Small, mid-cap plantation players weighed down by debt, low prices

Some firms are operating at a loss as the low CPO price is making it hard to service debts and pay the operational costs

by ALIFAH ZAINUDDIN / pic by TMR FILE

THE low crude palm oil (CPO) price and Malaysian Sustainable Palm Oil (MSPO) requirement could see an uptick in merger and acquisition (M&A) activities in the plantation industry as some players seek an exit.

Industry sources said small-and mid-cap plantation firms are under financial stress due to the low commodity price and high debts, leading some to operate at a loss, but no deals may be done as shareholders still demand a high valuation on a sale.

“The mid-size planters who have high debts are struggling as the low CPO price is making it hard to service debts and pay the operational costs. Cash-rich companies like IOI Corp Bhd are in no hurry to make a deal as the price asked is high,” an industry source told The Malaysian Reserve.

Many are opting to talk to potential M&A targets just to get a feel of the market, knowing the bearish price and industry outlook is in their favour.

With Indonesian yields rising, the market has ample supply of CPO. CPO price has remained depressed at between RM1,850 and RM1,900 levels this month, and the bearish price out

look is leading to calls for short-term fixes like increasing the usage of CPO in biofuels much like what has been done in Indonesia with its B20 mix.

The threat of a CPO import ban by Europe for biofuels in years to come is a further risk factor.

The source said with the MSPO standard being made mandatory for smallholders by Dec 31, 2019, many are not bothered with the certification and are instead seeking potential buyers to take over their businesses or lands.

“Many smallholders with small acreages (300ha or more) are also seeking an exit as the next generation is not keen on being in agriculture. The MSPO will mean more cost for these planters who are already struggling with issues like manpower and low prices,” he said, adding that the industry is lacking leadership.

Bloomberg data shows there are 35 listed small-and mid-cap plantation companies on Bursa Malaysia. These are companies which fall under the RM2 billion mark.

About half of these companies have accrued higher debt in the last year primarily due to lower commodity prices and higher labour costs.

They include IJM Plantations Bhd, Boustead Plantations Bhd, Hap Seng Plantations Holdings Bhd and Kretam Holdings Bhd.

IJM Plantations, which became a target for takeover rumours in August last year, has seen its total liabilities increase to RM952 million in its fourth quarter ended March 31, 2019 (4Q19), from RM896.3 million a year ago.

It was reported that IJM Plantations had attracted the interest of IOI and Hap Seng due to increased demand for mature acreage in Sabah.

IJM Plantations has 61,000ha of planted area in Sabah, Kalimantan and Sumatra. A deal would have seen IOI Corp’s land size increase by 35% to 235,377ha, or Hap Seng’s triple to 97,084 ha from 36,103 ha.

However, the takeover did not materialise due to pricing and concerns that the acquisition will increase IOI’s net gearing ratio significantly.

Boustead Plantations’ total liabilities have more than doubled in the last year to RM1.5 billion in its 1Q19 from RM695.3 million in 1Q18.

The company had announced plans to monetise several of its oil palm estates with a valuation between RM1 billion and RM1.2 billion in the next three to four years.

Its CEO Chow Kok Choy said the exercise could pare down its current borrowings amounting to RM1.4 billion or gearing ratio of 0.5 times to 0.2 times by 2022.

Other companies that have also accrued higher debt are Hap Seng and Kretam where total liabilities have risen to RM478.9 million and RM198.6 million from RM433.7 million and RM182.8 million respectively over the same period.