PETALING JAYA: The appetite for oil palm brownfield in Malaysia among big planters is expected to sustain this year with mergers and acquisitions (M&As) in the offing.
Industry experts and analysts pointed out that the ban on new oil palm land expansion, rising cost of production (COP), weak crude palm oil (CPO) prices and lack of interest in greenfield acquisition could trigger more M&A activities this year compared with 2018.
Plantation companies announced combined deals estimated at RM1.24bil in Malaysia last year and barely into 2019, a new deal worth RM175mil has been announced.
Notable M&As in 2018 included United Plantations Bhd’s acquisition of estates in Teluk Intan, Perak for RM414mil or RM120,336 per planted ha from PINEHILL PACIFIC BHD, and Boustead Plantations Bhd’s disposal of its 138.9ha land in Penang to SP Setia Bhd, which fetched an even higher valuation of RM979,508 per ha.
Interestingly, poultry-based Huat Lai Group, which was delisted in 2017, has offered to buy UNITED MALACCA BHD’s plantation estates in Negri Sembilan and Melaka for RM175mil cash, or equivalent to about RM171,533 per ha this year.
United Malacca chief executive officer Peter Benjamin told StarBiz there would be a big preference for brownfield among big plantation companies, going forward, especially with the ban on new oil palm land expansion in Malaysia as well as the halt on new permits for oil palm plantations in Indonesia.
For smaller planters, many would not be able to cope with the rising COP, said one industry expert.
“For start-ups, their COP could be as high as RM2,000 per tonne of CPO, especially due to their young palm trees. Hence, smaller planters might want to let go of their brownfield estates,” he said.
On the other hand, Malaysian Palm Oil Association CEO Datuk Mohamad Nageeb Ahmad Abdul Wahab expected increasing M&As among planters this year.
“A lot of big players are cash-strapped and many will be focusing on consolidation this year, unless there is a huge bargain (for brownfield land),” he pointed out.
Meanwhile, Maybank IB Research said in its latest report that “there is a divergence between physically transacted estates and M&A prices and the equity share prices, whereby a number of plantation stocks are still trading at or below their replacement costs.
“This may fuel more M&A activities in 2019.
“The long funds should take the opportunity to accumulate bombed-out, small mid-cap stocks. Those that are trading near or below their 2009 global financial crisis trough price-to-book values (PBVs) include SARAWAK OIL PALMS BHD, TA ANN HOLDINGS BHD and TH Plantations Bhd,” added the research unit.
Despite the recent weak CPO prices, Maybank IB Research said the transacted prices for estates and M&As continue to chart new highs. In 2018, United Plantations offered to buy estates in Perak for RM120,000 per ha, while in Sabah, estates were offered at RM79,000-RM99,700 per ha.
On Jan 3, United Malacca proposed to sell its Negri Sembilan and Melaka estates for RM172,000 per ha to a poultry company.
“On the flip side, small to mid-caps are only trading at an implied enterprise value per ha of RM26,000-RM36,000, which is at or below replacement costs.
“There is an obvious disconnect between physical prices and equity stock prices; this valuation gap will have to narrow,” it added.
Maybank IB Research also said prolonged low equity prices would likely tempt major shareholders or corporate raiders to seek out good deals.
“Even without those, this is still an opportune time for long funds to accumulate on bombed-out, small-cap stocks, especially those trading near or below 2009 global financial crisis (GFC) trough valuations.”
For stocks under its coverage, Maybank IB Research has a “buy” call on Sarawak Oil Palms and Ta Ann Holdings, as both stocks are still trading near or below their 2009 GFC trough valuations despite the recent share price recovery, suggesting further upside.
“However, in the immediate term, investors should expect some volatility in the first half of 2019 and be mindful that the sector is likely to report a set of weak fourth-quarter 2018 (4Q18) results in February, as the CPO spot price has been weak, having averaged just RM1,920 per tonne in 4Q18 versus RM2,189 per tonne in 3Q18 and RM2,606 per tonne in 4Q17.
“Furthermore, at RM1,920 per tonne, it is below the COP of many local planters,” it said.
Having said that, the research unit expected 2019 to be a year of recovery for the CPO price.
In the past two decades, there have been two occasions when the CPO price traded below the industry’s COP in 2000-2001 and 2008-2009 – and this was repeated in the second-half of 2018.
“History has shown that low CPO spot prices usually last for about six months before price recovery sets in, as producers cannot afford to continuously sell below cost over an extended period of time.
“In this current cycle of price weakness, we are already into the fourth month of low CPO spot prices, this could potentially extend for one to two more months.
“If history is any good as a guide, a meaningful price recovery could set in, likely in the second quarter of 2019,” added the research unit.