• TH Plantations (THP) and Cenergi SEA Berhad have recently entered a joint venture (JV) agreement to co-develop a 1.2MW biogas power plant in Bukit Lawiang, Kluang, Johor and the electricity which generated from this biogas power plant will be exported and sold to TNB for 21 years period.

• THP’s Al-Falah 22/22, however, targets a fresh fruit bunches (FFB) yield of 22MT/Ha and OER of 22% by 2028, a business plan strategy that encapsulate the '22/22' in its name, and aligns with its ESG strategy of achieving the Zero Waste Circular Economy through it.

• We are positive on the JV, as this signifies a milestone in progress for THP on their sustainability journey, aligning with their Al-Falah 22/22 strategic plan, which aims particularly at mitigating GHG emissions and demonstrates their commitment to integrating ESG principles in support of the Sustainable Development Goals (SDG).

The Beginning of a New Venture

On 13th June 2024, TH Plantation (THP) under its wholly-owned subsidiary, THP Applications & Services Sdn. Bhd. (THPAS), has signed a joint venture (JV) agreement with Cenergi SEA Berhad under its subsidiary company, Cenergi RE Sdn. Bhd. (Cenergi), a premier sustainable energy solutions company specialising in reducing carbon emissions through investment in renewable energy (RE) and energy efficiency (EE) projects. Through the JV, both THP and Cenergi RE have set up a special purpose vehicle (SPV), Cenergi Lawiang (THP and Cenergi RE own 60% and 40% of equity stake respectively) which will undertake to:

1) Designing, engineering, financing, constructing, commissioning, ownership, operation, and maintenance of 1.2MW biogas power plant which utilises palm oil mill effluent (POME) from Bukit Lawiang Palm Oil Mill located at KM 20, Jalan Kluang-Kota Tinggi, Kluang, Johor on build-own-operate-transfer (BOOT) basis

2) Process the POME to be supplied by Bukit Lawiang Palm Oil Mill and to generate biogas

3) Use the produced biogas to generate and sell electric energy to Tenaga Nasional Berhad Malaysia (TNB) for 21 years period under the Sustainable Energy Development Authority Malaysia (SEDA) program. The rate will be in accordance to the SEDA Feed-in Tariff (FiT) agreed with Tenaga Nasional Berhad (TNB), which is approximately 42sen/kWh for an installed capacity up to and including 4MW (refer to Table 1).

Al-Falah 22/22: A Unified Approach to Transforming THP's Operations

The House of AL-Falah 22/22 establishes a comprehensive and unifying goal that steers THP's efforts, ensuring all endeavours contribute to a cohesive and impactful outcome. Focused on financials, operations and people, the strategic thrusts of AL-Falah 22/22 are designed to solidify the business plan with clearly defined targets outlined in the Comprehensive Work Plans (CWPs) (refer to Table 3). Taking 2023 as a benchmark, with a FFB yield of 15.18 MT/Ha and an oil extraction rate (OER) of 19.17%, THP's AL-Falah 22/22 5-Year Strategic Business Plan aims to elevate FFB yield to 22 MT/Ha and achieve an OER of 22% by 2028, encapsulating the '22/22' ethos. This underscores THP's proactive management and sustainable operations strategy aimed at enhancing estate and mill performance as Al Falah 22/22 acts as a roadmap for THP's journey towards sustainable growth and profitability. Guided by management, the transformation plan encompasses estate rehabilitation, replanting, mechanization and improved cost management of plantation operations. Additionally, there is a focus on exploring new business opportunities to diversify income streams and boost business margins.

Holistic Approach to Environmental, Social and Governance Responsibility

Currently, THP has been implementing a "Back to Basics" approach through agronomy practices that minimize environmental impact. This includes a fertilizer program designed to optimize manure application and maintain good cover crops in immature and young mature areas. Additionally, its mechanization initiatives help to address labor shortages and dependency on foreign labor while enhancing operational efficiencies. In alignment with its Environmental, Social & Governance (ESG) Plan under the Al-Falah 22/22, THP aims to achieve a Zero Waste Circular Economy, which is structured around three primary initiatives and seven components. The first initiative focuses on reducing greenhouse gas (GHG) emissions, demonstrated by THP's JV with Cenergi RE to optimize POME treatment through biogas conversion. This initiative targets an annual reduction of 28,000 tons of carbon emissions which will be supported by its GHG emission mapping. Additionally, THP plans to install rooftop solar panels, aiming for a 30% reduction in diesel consumption by 2028, further contributing to GHG emission reductions.

Other initiatives include biodiversity efforts encompass a Recovery Project Plan covering 4,300Ha and Sarawak conservation activities spanning 950 hectares. These efforts are complemented by annual Malaysian Sustainable Palm Oil (MSPO) certifications, ensuring ongoing compliance. Notably, THP maintains a full compliant with the MSPO standards, ensuring sustainable and responsible management practices across all estates. Their operations in Peninsular Malaysia, Sabah and Sarawak are 100% MSPO certified. Additionally, the company's traceability systems and sustainable land-use practices align with the European Union Deforestation Regulation (EUDR), with no reported issues concerning EUDR compliance, as confirmed by the management. These measures reflect THP’s commitment to environmental sustainability and adherence to global regulatory standards. Moreover, with people inclusivity in its ESG endeavour, THP deploying Occupational Safety and Health (OSH) coordinators across estates, mills, and headquarters, ensuring regulatory compliance and enhancing safety standards.

Path towards Renewable Energy Integration and Sustainable Practices

Further enhancing their ESG commitments, THP has integrated renewable energy (RE) solutions, such as biofuel, into their operations and has progressively installed solar panels across estates, mill offices, guardhouses and street lightings. By 2022, they completed the installation of Tertiary Effluent Treatment Plants (TETPs) in their Sabah and Sarawak mills, with plans to extend TETP installations to their Peninsular Malaysia mills, aiming to reduce Biological Oxygen Demand (BOD) levels to below 20ppm and equip these mills with biogas plants. Additionally, The Group intends to repurpose palm product waste, including PK shells, EFB and fibres, as fuel for RE and fertiliser substitute where feasible. As of 2023, the company has improved on their biomass residue as compared to the previous year, which they have utilised more than 99%, while the remaining was sold (refer to Table 4). Reflecting their robust ESG management, THP was included in Bursa Malaysia's FTSE4GOOD Bursa Index and FTSE4GOOD Bursa Malaysia Syariah Index, effective 19th December 2022, maintaining an overall rating above 3.3 according to the FTSE Russell ESG Rating Methodology. Additionally, the JV with Cenergi seen to facilitate knowledge exchange and technological transfer, leveraging Cenergi’s specialised expertise in renewable energy technologies. By integrating Cenergi’s proficiency in biogas and biomass solutions, this would help THP to accelerates the adoption of sustainable practices across its operations.

Our Thoughts - Advancing Environmental Solutions

In our view, the JV between THP and Cenergi represents a significant milestone in THP’s sustainability journey and a strategic advancement in its environmental stewardship. This partnership directly contributes to several SDGs, particularly SDG 7 (Affordable and Clean Energy) and SDG 13 (Climate Action), through the establishment of a biogas power plant in Bukit Lawiang, which enhances its POME treatment and substantially reduces GHG emissions. Furthermore, leveraging solar potential, THP could possibly explore the installation of solar panels to enhance land value, particularly in Sarawak. Beyond GHG emission reduction efforts, this initiative could help the company to diversify its income streams by potentially exporting excess electricity generated and exploring the integration of biomass pellet potential to further enhance these efforts. Nevertheless, in reflect of the ESG commitment demonstrated by THP and based on our framework which evaluates its overall ESG risk, we have assigned THP a “Fair” ESG Rating with ESG Score of 2.31. However, through this JV, we believe that their ESG score rating will be improved in near future coupled with constructive disclosure of their sustainability efforts through the Al-Falah 22/22. We are positive with our view as THP has shown significant improvements and progress in their sustainability journey.

Source: BIMB Securities Research - 9 Jul 2024