FOLLOWING the completion of the acquisition of IJM Plantations Bhd by Kuala Lumpur Kepong Bhd (KLK), the spotlight has been on that sector and whether more players will follow suit with similar deals.
Scarce land and strong crude palm oil (CPO) prices coupled with the effects of the pandemic on plantation companies, especially in relation to their labour resources, are said to be reasons why planters would seek to engage in mergers and acquisitions (M&As).
The severe shortage of foreign workers due to the closure of the national borders as well as environmental, social and governance (ESG) issues in the labour-intensive industry have pushed companies to focus on their core businesses.
This is driving some listed-plantation companies to explore a consolidation of their assets, or a privatisation exercise or even exiting the sector, analysts say.
According to CGS-CIMB Research head of research Ivy Ng, investment holding companies with plantation as a non-core business could be more inclined to streamline their businesses and consider disposing their plantation assets.
On the other hand, she says companies looking to acquire plantations in the prevailing market conditions are those that have plantation division as its core business.
Citing the KLK-IJM deal, Ng points out that the diversified group IJM decided to dispose of their plantation arm to KLK because they wanted to focus on their core businesses, while the latter acquired plantation assets because it is their core business.
“The underlying challenges of planters facing lower fresh fruit bunch (FFB) production from labour constraints in the country to rising cost of production driven by the upping of the labour practices have led to this trend evolving in the plantation sector,” she explains.
Interestingly, Malaysian conglomerate Boustead Holdings Bhd, which has a market value of RM1.4bil was also said to be mulling its options to sell some of its plantation assets or possibly even leasing its plantations to third parties in order to focus on its non-plantation core businesses.
It is worthy to note that palm oil giant IOI Corp Bhd was busy acquiring oil palm plantation land in Sabah from NPC Resources two months ago. Last month, the cash-rich planter announced that it has set aside around RM794mil for future investments.
Another key example of restructuring assets is that Federal Land Development Authority (Felda) had raised its stake in FGV Holdings Bhd by 44% to 78% for RM2.1bil despite its failed attempts to privatise the latter.
Moreover, last week, an online news portal disclosed that Malaysia’s pilgrimage fund Lembaga Tabung Haji
was weighing its options to take its agricultural firm TH Plantations Bhd private.
Meanwhile, one successful privatisation was executed last year of plantation firm Kwantas Corp Bhd for RM200mil by its major shareholder.
Down south, Johor-state owned investment arm Johor Corp Bhd announced recently that it is eyeing to relist its plantation arm Kulim (Malaysia) Bhd in the next three years, in line with its large-scale restructuring exercise.
So far, in this year alone, at least six M&A deals in the plantation sector worth a combined RM3.56bil have been announced, according to Maybank IB Research.
Year-to-date, the M&A activities in the plantation sector have surpassed the RM3bil transacted values recorded last year.
Having said that, Ng says each individual company is keen to embark on various strategies to restructure and consolidate their plantation assets.
And with environmental, social and governance (ESG) compliance becoming more mainstream, she reckons sustainability requirements have also been a key factor for businesses to restructure and consolidate their assets.
It is worth noting that the United States Customs and Border Protection (CBP) has banned imports from FGV Holdings Bhd and Sime Darby Plantation Bhd, highlighting the importance to the ESG criteria.
Adds Ng: “To comply with the ESG matrix, the standards that plantation companies are going to deploy in their estates is going to be higher and in turn, cost will rise for these companies.
“Moreover, coupled with lower production faced by planters due to shortage of labour, some companies may decide to exit the sector or either consolidate their assets because of the lingering challenges currently”.
The various corporate exercises in the plantation sector is likely to be carried out for the next one year due to anticipated elevated CPO price above the RM3,000 level mark, according to an industry analyst.
“The higher CPO prices would ensure that plantation companies have good cashflow due to more profitability.
“This is why I expect privatisation exercises to take place between the small and mid cap players.
“A lot of small and mid cap planters are trading below the 0.5 times price-book-value that makes them quite an attractive target to be taken private,” enthuses the analyst.
Wong Muh Rong, who runs a boutique corporate advisory firm Astramina Advisory Sdn Bhd, echoes similar views saying that M&As between small and mid cap planters are more frequently materialised as it is a total buy-up of the planted landbanks surrounding the more sizeable planted areas.
In the past, Wong was involved in the demerger of the Tradewinds (M) Bhd which owns Tradewinds Plantation Bhd. Previously, she was also engaged in a number of privatisation deals such as Malakoff Corp Bhd, Road Builder Bhd and Magnum Bhd.
Wong opines that large scale M&As is not easy to come by during this period as it is difficult to find both a willing seller and buyer to merge the plantations business in totality.