Sime Darby Oils — the rebranding of downstream businesses

We previously operated under different names around the globe and there was no sense of belonging to a downstream company, says MD

By NG MIN SHEN / Pic by RAZAK GHAZALI

On March 4, Sime Darby Plantation Bhd, the world’s largest palm oil plantation company by planted acreage, decided to amalgamate all its downstream assets globally into a rebranded entity, named Sime Darby Oils (SDO).

The rebranding exercise — the first for its entire downstream division — aims to establish SDO as a sustainable oils and fats multinational, involved in the trading,
manufacturing, sales and marketing of oils and fats products, palm oil-based biodiesel, nutraceuticals and other derivatives.

The Sime Darby group produces about 2.48 million tonnes or 4% of the world’s crude palm oil (CPO) output annually, of which about 98% or 2.43 million tonnes are certified sustainable palm oil.

Sime Darby Plantation’s upstream operations — which are mainly in oil palm cultivation, harvesting and milling — span over 630,000ha in Malaysia, Indonesia, Liberia, Papua New Guinea (PNG) and the Solomon Islands.

The firm has a landbank of one million ha across these five countries.

Its global network covers Malaysia, China, the Netherlands, the UK, South Africa, Thailand, Indonesia and PNG.

The Malaysian Reserve recently sat down for an interview with SDO MD Mohd Haris Mohd Arshad (pictrure), who also serves as Sime Darby Plantation’s COO, to get a better understanding of where the group is heading with the recent corporate exercise undertaken and its strategic aim.

Could you share some of SDO’s plans for 2019?

Mohd Haris: SDO is essentially an amalgamation of all our downstream assets across the world. We did it so as to have a face in the market, as we previously operated under different names around the globe and there was no sense of belonging to a downstream company — you’re localised in your domain.

To grow your downstream company, you have to start with a common ground and with that, you can build on future aspirations. We’ll undertake a six-year journey up to 2025.

For this year, our objective is to complete our expansion organically. We’ve allocated RM400 million in capital expenditure to be shared across all of our South-East Asian refineries.

We are doubling our biodiesel capacity at our refinery in Thailand, from 60,000 tonnes per annum (pa) to 120,000 tonnes pa. We’re adding another 90,000-tonne processing capacity to our existing facility in Kuala Langat, Selangor, which is a 300,000-tonne-pa refinery. Third is to build warehousing and shortening manufacturing capability at our refinery in the North Port.

We recently established a presence in North America, and we’re now at an advanced stage to look into a presence in the Middle East. These are purely offices, not manufacturing facilities. Our manufacturing is now centralised in South-East Asia with a global sales team in Malaysia. We don’t have the proximity to customers. We want to be more centre-led. This is purely a hub for us to manufacture and deliver, but the action should happen at the destination.

Who are your biggest customers? Are there any new markets you’re eyeing?

Mohd Haris: We ship roughly 800,000 to one million tonnes of palm products to India every year, primarily because we get the best price relatively there. We ship about 500,000 tonnes to 600,000 tonnes of palm oil into Europe every year. Europe is quite significant as it is still the best-paying market for palm oil from PNG.

There’s also the risk of becoming too dependent on one market — so, we have identified a couple of markets where we want to grow. West Africa is interesting because key customers there are now expanding and they’ve invited us over to see how we can work with them to ensure secure supplies. There’s also the Middle East, which we define as Gulf countries, North Africa and up to Turkey. We’re also starting to look at Pakistan. These are the so-called palm-friendly markets as they prefer palm oil over other edible oils like rapeseed, sunflower and soyoil because palm oil is the most affordable and versatile.

What are your main products? Is there anything new in the works?

Mohd Haris: Our total refining capacity stands at about 3.8 million tonnes pa, of which two million is considered bulk refining and 1.8 million is specialty or differentiated refining. Our biggest product is still palm olein. We also make palm stearin, which is mainly used for soap-making.

One area we’ve seen tremendous growth is in shortening, which is basically oil that’s been converted to fat through texturisation. It’s a multi-purpose fat that can be used for making breads, cookies, for frying and so on. Food manufacturing beyond simple frying is where shortening is in demand.

As an integrated producer, we have better control of incoming CPO, which allows us to select the best oil for processing. We have a brand called Certio, which is produced using palm oil with an ultra-low free fatty acid (FFA) composition. The average FFA of CPO at a typical refinery would range between 3% and 4%, but the FFA in Certio is about 1.2%. This is not a product that’s readily available in the market, but we can do it because of our integration. What we produce is 100% natural.

For food manufacturers like Nestlé SA, Kellogg Co and Unilever, using CPO with low FFA makes a world of difference to the shelf life of their products. If chips are fried with Certio, the resulting product can stay on the shelf longer. If someone like KFC or Texas Chicken uses Certio to fry chicken, instead of discarding the oil after 20 cycles, they can double it to 40 cycles. Lower FFA means there’s lower oxidisation, hence the oil lasts longer during frying and the products last longer when the oil is used.

We’ve been selling Certio for a long time, but we’ve never attempted to produce more. Now, with our upstream colleagues, we’ve devised a way to produce more of this high-quality oil. Certio certainly has been a huge growth area for us. The expansion at our Langat refinery is mostly for expansion of our shortening offerings. We currently produce about 60,000 tonnes of Certio a year. The idea is to ramp it up to 120,000 tonnes a year, which is the maximum, given the current infrastructure. Certio would give us a margin uplift of about 10%.

We also recently rebranded our tocotrienol product called Natriol. Tocotrienol is an antioxidant derived from palm oil. It’s used in cosmetics like SK-II. The biggest market today for tocotrienol is the US — in cosmetics. But people have not had the pure consumption of tocotrienol itself, so this is it.

What about biodiesel?

Mohd Haris: Given the low CPO prices, biodiesel demand is now starting to emerge from markets like China, to our surprise, which is importing a lot more than in the past. Indonesia is now imposing a higher biodiesel mandate which is creating a slight capacity squeeze. We’re seeing more export demand today, which could incentivise people to increase capacity. That’s a very interesting, little business that we operate in, but we’re not actively seeking to expand it, unless the right opportunity comes our way.

What’s your biggest challenge this year?

Mohd Haris: Our biggest challenge is demand. By that, I mean the world is not short of oil. Stocks are very high. The markets that were traditionally buying oil are slowing down their purchases. If you’re an upstream player, you get lower CPO prices.

Although the downstream side tends to be more resistant to price movement, we do see risk of sales or offtake slowing. People are sitting on their hands, they’re not ordering as much. This isn’t necessarily because of the anti-palm oil campaign. It’s to do with the fact that there’s so much edible oil in the market, which is why biodiesel is an important outlet to divest some of the excess oil.

In light of these hurdles, what’s your game plan?

Mohd Haris: There’s nothing that we can do for the short term other than ensuring our level of customer service remains at its highest. We are fortunate in that there is some stickiness with our customers, because of our sustainability credentials. We also sell specialty oils, which are tailored to clients’ specification, so it’s not easy for them to move away.

Any plan for mergers and acquisitions (M&A) or joint ventures (JVs)?

Mohd Haris: When we ship out, we sell to importers who bring the oil into their country and process it, and then distribute it. We’ve been purely a CPO seller to these destinations, so we might want to look at acquiring an asset and start participating in the market.

Is there any M&A in particular that you’re eyeing?

Mohd Haris: There are a few that are certainly quite interesting for us but we’re going for small to mid-sized deals which will allow us to be more nimble. Rather than plonking one big investment in China, we should be looking at different markets. Have a few tie-ups here and there. Spread our risks. It will be primarily on acquiring refineries.

Will it happen this year?

Mohd Haris: I don’t foresee it. At the moment, there are a lot of assets available, but I can’t say their valuation is attractive, given where prices are today. We have to look at something which gives us a quicker payback and with respectable returns. So far, we’ve not scanned the market enough to see these opportunities yet.

This year is about finishing our expansion, ensuring operations continue to be lean and managing customers well. Hopefully, if the market turns for the better, we might start focusing on expansion beyond what we’ve committed.

When I joined in 2014, my mandate was very simple: Can you make downstream not lose money? We were not making consistent money before. Now we’ve achieved that. Not only did we not lose money, we were growing profit year-on-year. At about the third year of my tenure, we decided to make ourselves a bit uncomfortable and call the shot of doubling our profitability, which meant doubling profit before tax from about RM300 million currently to RM600 million by 2022. This is just Phase One.

Phase Two focuses more on operational excellence. I can’t emphasise this enough because I think we are not the best-performing refineries. There are still leakages in our organisation that we need to get out of the way. Once we’re satisfied we can achieve that, then the M&A will come.

When you buy a distressed asset, you need to know how to turn it around. Hopefully, by doing all this, we can increase our profit contribution to the group from 20% now to about 35% and maybe even 40%. I wouldn’t go as far as 50% this year, but the ambition is for the group to have more balanced contribution from the upstream and downstream segments.

Any plan for an initial public offering?

Mohd Haris: You list because you want to unlock value. At the moment, for us to grow through M&A, it will require some funding, and it is not necessarily going to come through listing. It could be through debt or cash injections. Listing is probably way, way down the road, even if it makes sense.

Are you definitely profitable right now?

Mohd Haris: We’re consistently profitable. We’ve been making record profits, but in small increments for the last four years.

Are there new areas you may venture into, such as non-oil products?

Mohd Haris: Apart from selling commodity products, we want to de-commoditise commodities. At the same time, we don’t want to compete with our customers. We need them to expand their customer base.

We’re focusing on the foodservice industry, which means we’ll be selling cooking oils to hospitals, hotels or restaurants. The concept of foodservice is that it carries a variety of products.

As to whether we’ll be producing other stuff (non-oil products), the answer is no, but if there’s a business case for us to expand our product offerings to help sell our oil, we may look at that. We could partner other players to package our products together or we could become a trading company that buys sugar, flour and other products. The idea here is not necessarily to make money from trading — it’s to come up with a large offering so that you can push your edible oil.

In the US, they consume about 12 million tonnes of edible oil, about half of that is by the foodservice sector. We don’t know what’s the size of the foodservice market in Malaysia, but our theory is, it’s an underserved market. If you want to be serving restaurants or food stores, this is one model we need to look at.

Fast-moving consumer goods companies like Nestlé and Unilever have foodservice offerings. Foodservice is a very specialised function — if you’re the pizza owner, you want someone who can bring in the flour, oil, all you need. Hence, that’s something we’re trying to explore.