Boustead expects consolidation, listing of plantations to maximise shareholder value

by **Cals** Mon 27 Jan 2014, 01:52

Published: Saturday January 25, 2014 MYT 12:00:00 AM
Updated: Saturday January 25, 2014 MYT 8:45:41 PM
Boustead expects consolidation, listing of plantations to maximise shareholder value
BY JOHN LOH
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The proceeds from the IPO will be used to beef up Boustead Plan tations’ landbank via acquisitions, for replanting and capital expenditure, to settle inter company debts and to pay for the listing expenses .
THE listing of Boustead Holdings Bhd’s plantation arm is set to create a top five plantation stock on Bursa Malaysia with significant upstream exposure, a sizeable and growing landbank, and a dividend payout commitment of 60%.
Its retail portion is also the largest in recent memory. The initial public offering (IPO) of Boustead Plantations Bhd, slated for the second quarter of this year, is selling up to 656 million shares of its enlarged 1.6 billion share base, comprising 580 new million shares and 76 million existing shares under the offer for sale from its parent.
While institutional funds have been allocated 163.57 million shares, retailers can get their hands on 492.43 million shares.
Boustead will, however, opt for a restricted offer for sale (ROS) to reward its own shareholders, as well as those of the now-delisted Al-Hadharah Boustead REIT(Boustead REIT), which had previously held some of the group’s plantation assets.
This means retail investors need to own Boustead and Boustead REIT shares in order to be eligible for the IPO.
According to its draft prospectus, the ROS entitlement has been fixed at three Boustead Plantations shares for every five Boustead REIT shares and one Boustead Plantations share for every five Boustead shares.
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Some 174.59 million and 206.84 million shares will be set aside for the two categories, respectively.
The remaining 47 million and 64 million shares for retailers have been apportioned for directors and staff and the Malaysian public.
Diversified conglomerate Boustead intends to keep a controlling 59% stake in Boustead Plantations, the first plantation IPO since Felda Global Ventures Bhd’s mega-listing in 2012.
As the prospectus is still at the draft stage, the pricing and valuations have yet to be determined.
The proceeds will be used to beef up Boustead Plantations’ landbank via acquisitions, for replanting and capital expenditure, to settle intercompany debts and to pay for the listing expenses.
But with Boustead REIT having been taken private just months ago, why the urgency to list Boustead Plantations by mid-2014?
“We have been working on this for the past few months. To be clear, it is not so much of an urgency, but an internal KPI that we had set for ourselves,” Boustead deputy chairman and group managing director Tan Sri Lodin Wok Kamaruddin tellsStarBizWeek via email.
“We are of the opinion that vegetable oils, particularly palm oil, will remain a strong commodity in years to come despite the fluctuation in prices and erratic palm oil stock levels. Demand for vegetable oils is certain to remain steady as global markets have come to realise the importance of palm oil, both from a health and cost perspective.
”Based on these considerations, we believe that the sooner we list the business, the better the long-term prospects, both from a funding perspective and to unlock value for investors who decide to take an early position.”

Rich heritage
Boustead Plantations can trace its roots back a century to when rubber, instead of oil palm, was the cash crop.
Kuala Sidim Public Co Ltd, as it was known then, owned rubber plantation estates, but it began converting these into oil palm in the 1960s.
The firm was dual-listed on the Malaysia and Singapore stock exchanges in 1973, but delisted from Singapore in 1990.
Boustead subsequently took it private in 2003 at RM6 a share because it was undervalued and did not fulfil the minimum free float. The group then put it back on the market in 2007 as Boustead REIT.
Boustead says it had originally intended for Boustead REIT to serve as the main vehicle for its plantations assets, but soon discovered that the REIT structure had outlived its usefulness.
As a REIT, Boustead REIT was constrained by the need to return at least 90% of its earnings in dividends to qualify for tax relief, which meant it had little funds left over for expansion.
This was complicated by the fact that plantation land, especially in Malaysia, was becoming more expensive. Alternately, younger and cheaper assets required a longer gestation period and high planting and maintenance costs, not to mention low initial yields, as palm oil trees can only be commercially harvested from the fourth year onwards.
Gearing up for mergers and acquisitions (M&A) wasn’t an option either due to the rule that REITs may only leverage up to half of their shareholders’ funds.
Its hands tied, Boustead again took its listed plantation arm private last year at RM2.10 apiece.
“The previous structure served its purpose to unlock value for shareholders. We gave investors the opportunity to participate in the plantation sector at a highly attractive entry level compared to what was available in the market for plantation stocks.
“The consolidation of our assets into one listed entity offers existing shareholders the opportunity to be part of a dedicated line of business, in addition to being part of the prospects inherent in a conglomerate such as Boustead. Hence, existing shareholders will have the benefit of ‘both worlds’ so to speak – the plantations business and the conglomerate,” Lodin quips.

Pure upstream play
Besides being a large-cap proxy to the domestic plantation sector, market observers say Boustead Plantations is a pure upstream play, given that almost all of its revenue comes from crude palm oil (CPO) sales.
Amidst the current uptrend in CPO prices, analysts say pure upstream counters like Genting Plantations Bhd, Ta Ann Holdings Bhd and TSH Resources Bhd, and possibly Boustead Plantations, should enjoy bigger share price gains because of their correlation to movements in CPO prices.
And with the sector having entered the low production season in December, coupled with the expectation that CPO prices will stay firm until the peak production cycle begins again near the end of the year, analysts say a debut for Boustead Plantations in the second quarter is well timed.
In the meantime, Boustead Plantations says its tree age profile supports an increase in fresh fruit bunch (FFB) production, as most of its trees are planted on fertile mineral soil.
More crucially, the company plans to grow its landbank by 20,000ha from the current total planted area of 71,092.7ha within five years. It will do so inorganically via M&A in Malaysia and abroad, the draft prospectus notes.
Half of the 20,000ha is to be financed by the IPO proceeds and debt instruments, while future fundraising activities will cover the rest.
Boustead Plantations, which primarily sells CPO and palm kernel locally, is also exploring the export market. Nonetheless, it has no shortage of customers on home soil, with 54 palm oil refineries in Malaysia that buy CPO as feedstock for oleochemical and edible oil products.
And though small, its research and development joint-venture with Kuala Lumpur Kepong Bhd (KLK) is ramping up production of a compact palm seed, which allows for high density planting to boost the number of palm trees planted per ha.
Be that as it may, Boustead Plantations’ operating statistics show that it not the most productive planter.
While its overall FFB yields have improved from 16.6 metric tonne per ha (MT/ha) in 2010 to 17.5 MT/ha in 2012, Boustead Plantations consistently lags the national average FFB yield, which in 2012 stood at 18.9 MT/ha.
Notably, its FFB yield, a key measure of a planter’s efficiency, trails that of its blue chips peers on Bursa Malaysia.
A quick check on the respective companies latest annual reports reveals that IJM Plantations Bhd’s Malaysian operations deliver a FFB yield of 26.5 MT/ha, ahead ofIOI Corp Bhd’s 24.5 MT/ha, Genting Plantations’ 23 MT/ha, KLK’s 22.5 MT/ha andSime Darby Bhd’s 21.5 MT/ha.
To be sure, Boustead Plantations’ FFB yield is weighed down by its Sabah and Sarawak estates, which saw only a yield of 17.2 MT/ha and 13.6 MT/ha in 2012 versus its Peninsular Malaysia FFB yield of 20.9 MT/ha.

OER beats benchmark
Its Sarawak estates have also had to contend with disputes from native customary rights landowners and unauthorised harvesting of its FFB.
On the flipside, its oil extraction rate from FFB processed to CPO is better than theMalaysian Palm Oil Board benchmark at 20.9% as at July 31, 2013.
In terms of tree age profile, Boustead Plantations’ mature and maturing trees, which are between four and 20 years old, clocks in at 77% of its planted area.
Immature oil palms of between zero and three years make up 9% of its land and the balance 13.8% are trees that have past their prime. This puts it on similar footing as Sime, KLK and IOI, with Sime’s 88% mature hectarage leading the pack.
A maturity profile of 77% peak or soon-to-be peak production trees implies that Boustead Plantations will soon have to scout for new green or brownfield landbank to stem any decline in its FFB output in the years to come.
Market observers opine that Boustead Plantations has to act fast, following on from its purchase of 2,400ha from Harn Lern Corp Bhd in Lahad Datu, Sabah, last year.
Maybank IB Research says in a note to clients earlier this month that Sabah plantation land will remain the preferred pick of Malaysian planters, with recent transactions being crossed at RM70,000-RM80,000 per ha.
“This is due to scarcity of plantation landbank and high asking prices in Peninsular Malaysia (property development potential),” it points out. The research house says Indonesian land is cheaper, but land suitability and ownership could prove challenging.
“Besides Indonesia, planters are prepared to venture into Papua New Guinea (PNG) and Africa for longer term growth. Nonetheless, new planting is expected to be relatively slow in PNG and Africa due to land issues and NGO activism.”
For the six months to July 31, 2013, Boustead Plantations’ profit after tax fell 85.5% to RM15.96mil from RM110.16mil in the same period a year ago. Sales also dipped 85.3% to RM372.08mil against RM524.51mil.