Investment Highlights

• Comparing the 3 big planters. In this report, we compare the operational and financial metrics of IOI Corporation, KL Kepong (KLK) and Sime Darby Plantation (SDP). We find that (1) size of landbank may not translate to higher earnings, (2) KLK is the most aggressive in M&As while IOI is more conservative, (3) KLK recorded the highest ROA (return on asset) in the upstream business in FY22, (4) SDP achieved the highest ROA in the downstream segment in FY22, and (5) IOI paid the most dividends in FY22 based on payout ratios.

• SDP - largest and most diversified. SDP is the biggest among the 3 planters. SDP has planted areas of 578,114ha of oil palm estates in Malaysia, Indonesia and Papua New Guinea. Second largest is KLK with 288,416ha of planted areas in Malaysia, Indonesia and Liberia. IOI is the smallest among the 3 companies with planted areas of 175,192ha, primarily in Malaysia. Africa is a challenging place as reflected in KLK and SDP’s write-downs of their investments in Liberia in the past couple of years.

• IOI’s plantation division is most profitable... Although IOI is the smallest among the 3 companies, it recorded the highest EBIT per ha of RM12,167 in FY22 (based on mature areas). In comparison, KLK’s plantation assets generated an EBIT of RM8,603/ha while SDP’s EBIT was estimated to be RM4,852/ha. We attribute SDP’s poor returns to the Malaysia division, which suffered a severe labour shortage in FY22.

• … even though its exposure to Indonesia is the smallest. Incidentally, IOI has the smallest exposure to Indonesia among the 3 planters. Indonesia accounts for less than 10% of IOI’s FFB production. In contrast, Indonesia accounted for 45% of SDP’s FY22 upstream earnings and more than half of KLK’s FFB production.

• In terms of FFB yields, KLK was the highest in FY22. KLK recorded an average FFB yield of 19.7 tonnes/ha in FY22 compared with IOI’s 19.3 tonnes/ha and SDP’s 16.6 tonnes/ha. IOI’s OER was 21.4% in FY22 vs. KLK’s 21.3% and SDP’s 21.1%. IOI and KLK were not as badly affected by the labour shortage in Malaysia as SDP. Also, we believe that age profile of the oil palm trees played a role as KLK has the smallest proportion of ageing oil palm trees. 25% of KLK’s planted areas are more than 20 years old compared with IOI’s 31% and SDP’s 29%.

• KLK has the largest oleochemical capacity while SDP is the biggest refiner. KLK’s oleochemical production capacity is estimated to be 3.3mil tonnes per year while IOI has an annual oleochemical capacity of 890,000 tonnes. SDP’s effective oleochemical capacity is 200,000 tonnes per year via its 50% stake in 2 plants in North America and Europe. As for refining, SDP is the largest with an annual capacity of 3.7mil tonnes. SDP has palm refineries in Malaysia, Indonesia, United Kingdom, South Africa and Netherlands.

• KLK’s manufacturing (refining and oleochemicals) division recorded the highest EBIT margin among the 3 companies in FY22. KLK’s manufacturing EBIT margin was 4.8% in FY22 against IOI’s 3.3% and SDP’s 4.3%. We attribute KLK’s superior EBIT margin to its operations in Europe and timely purchases of feedstock. Unfortunately, the good times did not last as oleochemical margins collapsed this year, dragged by a drop in demand and weaker selling prices.

• KLK and SDP had highest downstream ROA (returns on asset). Based on EBIT and net asset numbers of downstream or manufacturing divisions, SDP and KLK had the highest ROA of 17.7% and 17.6% respectively in FY22. In comparison, IOI’s ROA was 8.8%. We believe that size plays a role in downstream activities as a higher volume of production helps reduce the cost on a per tonne basis.

• KLK is the most aggressive in M&As. Since FY10, KLK has been making an acquisition every year with except in FY11, FY19 and FY22. Although IOI has cash reserves of more than RM2.5bil, the group has not carried out any major acquisition. Instead, IOI has been using some of the cash to build its RM230mil oleochemical plant in Penang. In contrast to KLK and IOI, SDP has been selling landbank instead of making acquisitions and expanding capacity.

• SDP had the highest FCF (free cash flow) per share of 27.9 sen in FY22. In comparison, IOI’s FCF was 21 sen/share while KLK’s FCF was -29.8 sen/share. We attribute SDP’s high FCF to high palm product prices but at the same time, capex was low as it was constrained by labour shortage in Malaysia. We believe that KLK’s free cash flows were negative due to its capex and investments in IJM Plantations (now known as Sawit Nusantara).

• IOI paid the most dividends in FY22. IOI’s dividend payout was 50.4% in FY22 vs. KLK’s 49.8% and SDP’s 44.6%. In spite of record earnings in FY22, SDP’s DPS fell as the group conserved cash in preparation for periods of weaker upstream and downstream earnings and ESG projects. In FY23, IOI’s dividend pay-out was 61.3%.

• Overall, the 3 planters achieved good ROEs in FY22 on the back of robust palm product prices. KLK and SDP’s ROE were 16.6% each in FY22 while IOI registered a ROE of 15.8%. Excluding FY22, the highest ROE ever achieved was IOI’s 33.4% in FY18 when the group recorded a gain of RM1.8bil on the disposal of Loders Croklaan. Going forward, we believe that the ROEs of the plantation companies will decline in line with weaker palm product prices.

• Neutral. Overall, we are neutral on the plantation sector. We think that CPO prices would be weighed down by higher supply in 2H2023. We maintain our 2023E CPO price assumptions of RM3,800/tonne for the pure Malaysian planters and RM3,500/tonne for those with Indonesia exposure.

Source: AmInvest Research - 21 Sept 2023