Betting on the King of Fruits

Big potential: While demand from China is high, it is said that only a small percentage of China’s population has tasted the fruit.

Ekovest Bhd’s announcement that it is willing to plough up to RM213.5mil into PLS Plantations Bhd shows just how much it is banking on the durian business.

Recall that in March, Ekovest paid RM76.2mil for a 23.42% stake in loss-making PLS Plantations.

PLS Plantations is undertaking a massive fundraising exercise that could see it raise gross proceeds of between RM213.5mil and RM1.05bil. It is for this that Ekovest has given its undertaking.

Ekovest is controlled by Tan Sri Lim Kang Hoo. Notably, when Ekovest bought its stake in the company, the shares were acquired from Lim himself. Lim and his family still have a 29% direct stake in PLS Plantations.

Back then, Ekovest said the move to buy a stake in PLS Plantations was to transform Ekovest into a larger listed conglomerate with “a larger portfolio of diversified business.”

Apparently Ekovest is making a major bet on PLS Plantations and by that, the durian business.

PLS Plantations has been actively growing its durian-related businesses.

In March it completed an acquisition of 70% of downstream durian exporter Dulai Fruits Enterprise Sdn Bhd for RM21mil, helping it become a complete upstream and downstream durian player.

Last Thursday, the company bought more durian plantations. It entered into a conditional sales and purchase agreement with Lee Seng Yean & Brothers Sdn Bhd for a proposed acquisition of 12 parcels of land that are currently being cultivated for durians.

PLS Plantations is looking to acquire the parcels for RM20mil to be satisfied entirely by cash.

It says the land being acquired already have mature durian trees of various species which will provide immediate yield that can be harvested.

Besides immediately contributing to earnings, PLS Plantations views this as a strategic investment.

Listed in 1995, its principal activity is in the management and operation of forest plantation and oil palm plantation.

In March, its joint venture with Shanghai-based Greenland Group sealed deals with four China-based fruits distributors to ship more durian products to China.

They are Shanghai Yuandi International Trading Co Ltd, Shanghai Supply Chain Management Co Ltd, Shanghai Haoyuan Food Co Ltd and Shanghai IVC Sun Supply Chain Management Co Ltd.

In April, FGV Holdings Bhd signed a heads of agreement with PLS Plantations to form a potential joint venture in the development of cash crop plantations, primarily durian.

Notably, the shares of PLS Plantations have been on a downtrend, and were last traded at 70 sen a share – one of its lowest prices in the last five years.

PLS Plantations is looking to raise up to RM1.05bil for its durian business and is undertaking a fundraising exercise.

The new redeemable preference shares (RPS) however are not convertible to the mother share and hence limits the issue of dilution. They also offer a fixed return of 6.9% on a 10-year period.

On Oct 25, PLS Plantations’ proposed issuance of 175.35 million new free warrants in the company on the basis of one warrant for every two shares held on an entitlement date to be determined by the board at a later date.

It is also proposing a renounceable rights issue of up to 1.05 billion RPS on the basis of two RPS for every one PLS share held on an entitlement date.

PLS Plantations intends to complete the proposed warrants issue prior to the proposed rights issue.

“Basically as a shareholder, you do not need to subscribe to the RPS. As an existing shareholder, you will also be entitled to the free warrant whether or not you subscribe to the RPS.

“The RPS is offering a fixed return of some 6.9% over the 10 years, which can be considered a very good alternative to fixed deposit rates which are at about 3%, ” said Astramina Advisory managing director Wong Muh Rong.

The RPS will be priced at RM1 each, and hence on a minimum scenario, where the proposed rights issue will entail the issuance of 213.51 million RPS, this will raise minimum gross proceeds of not less than RM213.51mil.

Ekovest has provided its irrevocable undertaking to subscribe in full all its entitlement to the RPS.

It has confirmed that it has sufficient financial resources to fulfil its commitment following its undertaking and Maybank Investment Bank (IB) has verified that Ekovest has sufficient financial resources to fulfil its commitment.

Maybank IB has been appointed as principal adviser to PLS and Astramina has been appointed as financial adviser to the company for the proposals.

Durian the next CPO?

While detractors point out the long gestation needed and the cyclical nature of the crop, there are signs that it could be a profitable business.

Durian continued to be the most widely-planted and harvested fruit in Malaysia in 2018.

Of all major fruit crops, durians made up 73,739ha or 38.32% of the total planted area for that year. Furthermore, durian recorded total production of 341,331.60 tonnes with total production value of RM5.15bil in 2018, which is the highest production value for major fruit crops in Malaysia.

The top three durian planting and producing states in Malaysia in 2018 were Johor, Pahang and Sarawak.

Due to the increased demand from China, the average farm price of Grade A Musang King durian has increased over the years, from RM9 per kg in 2012 to RM33 per kg in 2017.

The high prices of durian have started to attract large scale farming in Peninsular Malaysia.

“As durian cultivation can potentially generate nine times more revenue compared with palm oil on a per ha basis and generating operating margins in excess of 50%, this may compel some oil palm planters to switch crop at the next replanting cycle given the scarcity and high cost of land in Malaysia, and rising wages, ” said PLS Plantations in a filing with Bursa Malaysia on Oct 31, citing Maybank Kim Eng Research.

Strong demandWhile demand from China is high, it is said that only a small percentage of China’s population has tasted the fruit.

Thus recently, a growing number of investors are starting to acquire a taste for the thorny fruit’s financial prospects.

Earlier this month, private equity firm Navis Capital Partners acquired Malaysian downstream durian exporter Hernan Corp. Navis said it planned to invest up to RM400mil in the expansion plan of Hernan.

It added that it would help the company to grow its capacity to produce durian paste, puree and finished products such as mooncake, ice cream, chocolate and other durian-flavoured confectionery.

Moving forward, Navis says it is looking to acquire up to 10,000 acres of durian plantation in Pahang, in partnership with a local agriculture company.

Imports for the fruit into China have risen by 15% since 2017 to about 350,000 tonnes today.

Prior to this, Thailand was dominating China’s durian imports, accounting for some 40% of the market.

Lately, mainland Chinese consumers have taken a liking to the Musang King from Malaysia.

After months of negotiations, Malaysia received the approval of the Chinese authorities to export frozen whole durians to China in June.

The frozen whole durian fruits can be exported to China, starting with Beijing and Guangzhou, during the durian season from June to September.

Although Malaysia has been exporting frozen durian pieces to China since 2011, the new approvals will allow the whole fruit to be shipped to China, where demand for the premium durians are soaring.

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