THE offer by Kuala Lumpur Kepong Bhd (KLK) to buy out IJM Plantations Bhd (IJMP) should not come as a surprise considering that the latter had been on sale for quite a while, going by industry chatter.
Sources also say that there were competing bids for IJMP, but KLK’s offer price was said to be the highest. “There were some offers that came in prior to KLK’s offer but nothing came close to IJM Corp Bhd’s target price for its majority stake in IJMP which is even higher than what KLK is offering, ” a source says.
This week, KLK made an official offer to buy IJM Corp’s 56.2% stake in IJMP for RM3.10 apiece or a total of RM1.53bil.
As far back as 2018, reports had already surfaced that IJMP had become a takeover target of the big boys of the plantation industry, such as IOI Corp Bhd, Hap Seng Plantations Holdings Bhd and KLK.
However, the weakness in crude palm oil (CPO) prices and IJMP’s young tree profile of 6.8 years at that time had made it difficult for IJM Corp to get a desirable valuation, some reports had suggested. Now, with KLK having made an offer, a few questions arise. For one, could this deal signal the beginning of a consolidation process among the many Malaysian planters?
Another question is, why is KLK buying a significant plantation asset at a time when CPO prices are trading at their highest level? Would KLK risk over-paying? And why is IJM Corp selling its plantation arm?
For IJM Corp, it is believed that one consideration is due to the many environmental and labour issues that seem to affect plantation companies.
Last year, the United States banned imports of palm oil from FGV Holdings Bhd and Sime Darby Plantations Bhd following an investigation into allegations it uses forced labour.
While IJMP is known to be one of the best-managed plantation estates, surprisingly it is not a member of the Roundtable on Sustainable Palm Oil (RSPO), points out UOB Kay Hian Research.
“The challenge for KLK in the transaction is that IJMP is not an RSPO member which may raise questions from some clients.” However, the research house adds, “IJMP has already obtained the Malaysia Sustainable Palm Oil certification and also has the International Sustainability and Carbon Certification. Thus, it should not be a major issue for KLK to get RSPO membership for IJMP’s operations”.
KLK is a leading planter as far as sustainability issues are concerned, with 85% of its group landbank being RSPO certified, says Maybank IB Research.
“In financial year 2020 (FY20), its annual production of RSPO Certified Sustainable Palm Oil stood at 791, 202 tonnes, which is top five in the world and represents 79% of its CPO produced, ” the research house says.
An analyst points out that the plantation business has been dragging IJM Corp’s valuation.
The conglomerate mainly derives its revenue from the construction, infrastructure and property business. The plantation business contributed only about 10.4% to its revenue in FY20.
Meanwhile, KLK has been on an acquisition spree over the last few years. Last year KLK’s indirect unit Taiko Plantations Pte Ltd (TPPL) acquired TSH Resources Bhd’s Indonesian subsidiaries for US$109.23mil (RM450mil).
In 2018 KLK acquired a 95% stake in an Indonesian oil palm company, PT Putra Bongan Jaya, which has plantations in East Kalimantan, for about RM300mil.
An analyst expects more consolidation to take place within the plantation sector, especially with the current high CPO prices, coupled with the fact that there is a scarcity of plantation land.
For the KLK and IJMP deal, IJM Corp has agreed to accept the takeover offer but it will need to get approvals from its shareholders and lenders first.
In a statement yesterday, IJM Corp said that the proposed disposal is in the best interest of the group, given the attractive offer price and the maturity of the plantation business, which the company has no plans to expand further.
“The proposed disposal will result in a gain on disposal of RM700mil.
“The recent strong CPO price environment and a good showing by plantation companies have presented an opportune window for IJM to dispose of its plantation business at an acceptable price, ” says IJM Corp CEO and managing director Liew Hau Seng.
“The proposed disposal allows IJM Corp to realise its value in IJMP that has been underappreciated by the market, partly due to the illiquidity of the stock, ” he added.
Shares in IJMP closed at RM3.04 apiece, the highest since June 30, 2017.
Upon the execution of the deal, KLK is obliged to extend a mandatory general offer to acquire the remaining IJMP shares from other shareholders.
The deal is estimated to cost KLK RM2.7bil, which would increase its net gearing to 0.42 times from 0.23 times with a 30:70 debt-equity ratio, according to Kenanga Research.
“Assuming KLK succeeds in acquiring a 100% stake in IJMP we estimate an increase in KLK’s total oil palm planted area by 29% to 274, 000ha, its FY22 fresh fruit bunch (FFB) output to jump by 26% to 5.4 million tonnes and FY22 estimate core net profit to increase by 9%, ” the research house says.
IJMP is the seventh-largest plantation company in the country with a total planted area of 60, 981ha, which is mainly located in Sabah and Indonesia.
Meanwhile, KLK is the country’s third-largest oil palm plantation company with a total land size of 275, 000ha, after Sime Darby Plantations and FGV Holdings Bhd.
Presently, many plantation companies are enjoying good profit margins thanks to CPO prices that have been rallying since last year on the back of the economic recovery after the Covid-19 fallout.
For the second quarter ended March 31, KLK’s net profit jumped some 17 times to RM490.44mil from RM27.89mil in the same quarter a year ago.
This was driven by higher profits from its plantation, manufacturing and property development segments.
MIDF Research opines that the offer price of RM3.10 per share of IJMP is reasonable given that the current CPO price has breached RM4, 000 per tonne, which is also an all-time high.
“We think that the deal is fair for KLK to obtain a controlling stake in IJMP at an 18% premium to our target price of RM2.62 and is more likely to appear attractive enough for IJMP’s minorities to accept should the deal progress to a mandatory offer for the rest of IJMP shareholders, ” it says.