Investment Highlights

• Taking a look at land values. In this report, we look at the implied plantation land value of the companies or how much the market is valuing the planted areas of the companies. To arrive at this, we stripped out the value of the non-plantation assets from the market capitalisation of the plantation companies. Then, we divided the sum by the size of the planted areas of oil palm. Overall, the implied market value of the planted areas of the plantation companies in our coverage ranged from a low of RM15,121/ha to a high of RM102,630/ha (based on share prices as at 8 November 2021).

• IOI Corporation is the most expensive in terms of asset value. In our coverage, the implied value of the planted landbank of the integrated plantation companies is higher than the smaller players. We attribute the high asset values to the age profile and property development potential of some of the oil palm estates. IOI is the most expensive on an EV (enterprise value) per ha basis while KL Kepong (KLK) is second. The implied market value of IOI’s planted landbank is RM102,630/ha while KLK’s is RM54,373/ha.

• Decline in the implied landbank values due to ESG. Due to the lacklustre performance of the share prices, we find that the implied value of the planted landbank of some of the listed companies to be lower than the transacted prices of physical plantation land. If the large integrated companies had been trading at the peak of their share prices, we believe that their EV/ha would have been higher between RM60,000 and RM125,000.

• What about FGV? The implied market value of FGV’s planted landbank is high at RM89,582/ha based only on its own landbank of 55,297ha. If we include the land leased from FELDA, the implied market value of FGV’s planted landbank is low at RM15,121/ha. We believe that about 80% to 85% of FGV’s landbank are leased from FELDA.

• Cheaper to take over the company for land or buy the physical land instead? The low implied landbank value of some of the planters implies that it would be cheaper to acquire the company for its oil palm estates instead of buying the physical land. We believe that the selling price of a prime oil palm estate in Sabah is about RM70,000/ha to RM100,000/ha presently. However, only plantation companies with deep pockets and a strong balance sheet would be able to carry out a cash takeover of a listed planter. In addition, it would take time to integrate the operations of the merged entity. Furthermore, there are sustainability issues to consider if the take-over target is not RSPO-compliant. KLK’s cash take-over of IJM Plantations (IJMP) is estimated to cost about RM2.7bil (excluding assumption of IJMP’s borrowings) in total.

• Which companies have oil palm estates with property development potential? KLK has 20,106ha (titled areas) of oil palm estates in Johor and 1,214ha in Sungai Buloh. These are about 9.5% of the group’s FY20 planted areas of 223,623ha. Other companies with oil palm estates in Johor include IOI Corporation (23,968ha) and Genting Plantations (10,642ha).

• What are the selling prices of oil palm estates with solar or property development potential? In May 2020, Hap Seng Plantations sold 552ha of land in Tawau, Sabah to Hap Seng Consolidated for RM76.0mil or RM229,305/ha. In September 2020, Tradewinds Plantation sold 71ha of land in Alor Gajah, Melaka to Malakoff Corporation for RM150.0mil or RM2.1mil/ha. In September 2021, YTL Power acquired 664ha of oil palm estates in Kulai, Johor for RM428.8mil or RM645,783/ha from Boustead Plantations.

• Will plantation companies trade at their asset values? We believe this is unlikely due to a few reasons. First, a high asset value may not translate into high returns. Net earnings of the oil palm estates depend on palm prices, which are cyclical. On the other hand, CPO production costs increase every year. Return on equity of the plantation companies in our coverage ranged from a low of -5.0% to a high of only 8.9% in FY20. Second, plantation companies would have to monetise or sell their landbank to realise their asset values. As palm oil is a core business for planters, this is unlikely to take place unless the plantation company needs cash to reduce its net gearing ratio. Third, ESG issues such as greenhouse gas emissions and alleged forced labour conditions are affecting the share price performances of the planters currently.

• Does it matter if the plantation land is RSPO-compliant? So far, it appears that RSPO-compliance does not translate into a higher EV/ha. IJMP was not a member of RSPO but this did not deter KLK from making a cash offer for the group. We estimate that KLK’s offer valued IJMP at an EV of RM52,399/ha. In addition, many RSPO-compliance companies have a low EV/ha such as Sime Darby Plantation and Genting Plantations (GenP).

• High asset values = high PE? Coincidentally, integrated plantation companies such as IOI and KLK have higher EV/ha and PE compared with their smaller peers. The EV/ha of IOI and KLK are 52.0% to 186.8% higher than the smaller planters such as GenP and TSH Resources. In terms of PE, the integrated players are also more expensive than the smaller planters by 27% to 56%. We think that the integrated players are commanding higher PE multiples because of the size of their planted areas, global operations and integrated value chain.

• Investing in companies with low EV/ha may not translate into higher returns. The implied market value of GenP’s landbank is only RM35,781/ha. From 31 December 2020 to 29 October 2021, GenP’s share declined by 25.9% to RM7.30 from RM9.85. TSH’s share price was relatively flat at RM1.17 as at 29 October 2021 vs. RM1.15 as at 31 December 2020. Exception to this was IJMP, which surged to RM3.10 from RM1.82 on the back of KLK’s take-over.

• As such, we reckon that PE is still the most apt. We believe that PE is most apt compared with other valuation methods as it takes into account the earnings prospects of the companies. We reckon that EV/ha is a useful supplementary valuation tool to assess if a company is a take-over target. Currently, the integrated planters are trading at FY22F PEs of 18x to 22x vs. the smaller companies’ 16x to 19x.

• Neutral on the sector. In spite of robust CPO prices, we think that ESG concerns would continue to drag the valuations and share price performances of the plantation companies in our coverage. Also at CPO prices of RM5,000/tonne and above, we reckon that there is more downside than upside. A recovery in industry CPO production from 2Q2021 onwards may exert downward pressure on palm prices. Nevertheless for investors, who would like exposure to the palm oil sector, we would recommend Sime Darby Plantation (Fair value: RM4.88/share) for its leverage to CPO prices and resilient downstream operations. Our average CPO price assumption is RM3,000/tonne for 2022F vs. RM3,500/tonne in 2021E.

Source: AmInvest Research - 15 Nov 2021