- How to calculate the implied MV/ha? In this conceptual report, we take a look at the implied market valuation (MV) of the companies’ planted landbank. To arrive at the implied market valuation, we stripped out the value of the non-plantation assets from the market capitalisation of the plantation companies. This gives the valuation of the plantation division, which we divided with the size of the respective company’s oil palm areas.

- IOI Corporation’s planted landbank has the highest implied market valuation of RM162,302/ha. In terms of PE valuation, IOI is currently trading at 23x FY16F EPS. We attribute the premium to IOI’s plantation landbank to the high proportion of oil palm trees in prime stage and property development potential of some of the group’s land in Peninsular Malaysia. As at end-June 2014, about 60% of IOI’s oil palm trees were in the prime age of eight to 15 years. The risk is that a growing proportion of IOI’s oil palm trees may be ageing in the future. Roughly 15% of IOI’s planted areas are between 16 and 25 years old. The group plans to replant between 5,000ha and 8,000ha of areas every year. IOI replanted about 5,159ha of land in FY14. IOI has about 23,966ha of oil palm estates in Johor, which account for 14% of the group’s total planted areas. Approximately 43.8% of the oil palm estates are located in Kluang while another 34.9% are in Segamat. Although these landbank are close to Iskandar, we do not think that IOI would be venturing into property development anytime soon as property activities are undertaken by IOI’s sister company, IOI Properties.

- Felda Global Ventures’ (FGV) planted landbank has the lowest implied market valuation of RM21,521/ha. In contrast to this undemanding valuation, FGV’s FY15F PE is rich at 35x. The group’s implied market valuation is low in spite of the fact that FGV’s planted areas are the biggest among the plantation companies under our coverage. FGV has planted areas of almost 290,000ha. It appears that FGV is unable to generate meaningful returns from its assets. We forecast FGV’s return on equity at 3.6% for FY15F. We believe that the benefits of FGV’s replanting exercise would only be seen in five to seven years’ time. About 30% of FGV’s oil palm trees are more than 25 years old while another 18.1% of the trees are aged 21 to 25 years old.

- NEUTRAL on the plantation sector. In spite of the attractive implied market valuations of some of the plantation companies, we are not changing our stock recommendations. Although we do not have any BUY in our stock universe, for exposure to the plantation sector, we would recommend IJM Plantations. We like the group’s young oil palm trees in Indonesia and low net gearing of 13.0%. Among the big-cap planters, we favour Kuala Lumpur Kepong (KLK) for the same reasons. However, risk to KLK’s earnings is its downstream activities, which may face inventory write-downs due to declining crude oil prices.

Source: AmeSecurities Research - 3 Apr 2015