Large oil palm planters like Tan Sri Lee Shin Cheng’s IOI Corp Bhd, which last week paid RM830 million for close to 12,000ha of mature oil palm estates in Sabah, aren’t a favourite among investors currently due to the bearish outlook for crude palm oil (CPO) prices.
But expectations of lower CPO prices in the coming months may not be all bad for planters, some analysts say, pointing out that land deals at decent prices are more likely to happen in a bull-price environment, as against the uncertain outlook.
“If CPO prices are lower, there is a higher chance of more M&As (mergers and acquisitions) in my view,” CIMB Research’s regional plantations analyst Ivy Ng tells The Edge Financial Daily.
At least two land deals have already been made in the past two months. Apart from IOI Corp’s deal with Dutaland Bhd’s wholly owned unit last week, farm equipment maker CB Industrial Product Bhd also in June sold two oil palm estates in Miri, Sarawak for RM268.1 million.
Sentiment on planters is poor due to record high CPO stock levels. That well-followed CPO price trend predictor Dorab Mistry, a director at Godrej International Ltd, on July 28 said CPO futures could break below RM3,000 per tonne to as low as RM2,800 per tonne in September this year and this further weighed on sentiment.
Mistry had previously expected CPO to resume its rally towards the RM4,000 per tonne-level later this year. However, last week he revised his forecast to say that level will not likely be revisited until at least April 2012 — and that too depends on how long the CPO high-production cycle lasts.
He sees world palm oil production rising some 6% this year, at least six million tonnes more than last year, double the expected rise in biofuel demand.
Still, given planters’ long-term bullish stance on the industry and rich coffers, plantation companies are always keen on buying decent-sized estates to boost earnings if prices are right, analysts say. “The issue is whether they (planters) can meet (expectations) on pricing,” a plantation analyst adds.
That could be a boost for niche planters as well as companies with plantation estates like IJM Plantations Bhd, TDM Bhd, TSH Resources Bhd, Tradewinds Plantations Bhd, Kwantas Corp Bhd, Rimbunan Sawit Bhd and Hap Seng Plantations Holdings Bhd.
Dutaland rose 4.2% to close at 62.5 sen yesterday, up 14.7% over three days and 18% year-to-date. Among the smaller planters, IJM Plantations rose 1.8% to RM2.78 yesterday, Rimbunan Sawit added 2.07% to RM2.46 yesterday while TDM rose 1.26% to RM3.20 apiece.
An increase in the likelihood of deals happening means bigger plantation stocks may also be worth watching in the coming weeks for trading opportunities.
ECM Libra Research, for instance, last Friday, upgraded IOI Corp from “hold” to “trading buy” and raised its target price to RM6.11 from RM5.96. This was to take into account a 5.3% boost to FY12 earnings and a 7.7% boost to FY13 earnings. The brokerage named further sizeable palm oil estate acquisitions and property landbank transactions as among the re-rating catalysts. Similarly, UOB-KayHian Research upgraded its recommendation for IOI Corp to “hold” following the July 28 deal.
Other brokerage houses had kept their stance, according to Bloomberg data, largely due to the price tag for the deal. Some analysts also reckoned it may take time for IOI Corp to shore up the very low yields from the Sabah plantations, although the giant planter has the ability to do so.
Closing at RM5.14 yesterday, IOI Corp has shed 0.77% over two market days since the deal and is 11.5% lower year-to-date. There were 15 “hold” on IOI Corp versus only six “buy” and seven “sell” at the time of writing.
CIMB’s Ng, who thought the price — RM69,294 per ha of landbank and RM79,433 per ha of planted estates — that IOI Corp paid for the estates from Dutaland “is at best fair”, were among those who retained an “underperform” call on IOI Corp following the deal.
However, she is “overall slightly positive” on the transaction as it suggests that the group is back on the estate acquisition trail. The purchase, made at 8% premium to independent valuer’s valuation, will boost IOI Corp’s planted estates by 6.7% to 190,862ha, Ng calculated. For now, Ng prefers Sime Darby Bhd for exposure to the local plantation sector.
Sime Darby had the most analysts recommending a “buy” at the time of writing, followed by Kuala Lumpur Kepong Bhd (KLK), which has sizeable mature rubber tree acreage.
Sime Darby is only 3.7% away from its 52-week high of RM9.49 on Jan 4 when CPO prices were at RM3,700-levels while KLK is about 5.6% away from its 52-week high of RM22.98 apiece on Jan 19. IOI Corp, on the other hand, had fallen 16.6% from its 52-week high of RM6.16 on Jan 4.