Taking cue from Kwantas’ privatisation offer, there could be more corporate actions (in particularly, privatisations) among the plantation players) in the pipeline (particularly, should CPO price sustain at high level in the near to medium term). Privatisation aside, we believe M&A activities among plantation players will remain robust, given (i) the lack of available landbank for expansion; (ii) escalating cost pressure (amidst rising labour cost and labour shortage; and (iii) rising appetite for land bank (for property development and urbnisation purposes. We are keeping our average CPO price projections of RM2,350-2,400/mt in 2020-21, and Neutral stance on the sector unchanged. For exposure, our top pick is TSH Resources (BUY; TP: RM1.14).

Kwantas Corporation Bhd’s (KCB, Not Rated) major shareholders recently launched a surprise general offer (GO) to privatise Kwantas via selective capital reduction and repayment (SCR) at RM1.65/share (at 197% premium to its closing share price of RM0.555/share on 28 Aug 2020). Taking cue from Kwantas’ privatisation offer, there could be more corporate actions (in particular, privatisations) among the plantation players) in the pipeline (especially if CPO price sustain at high level in the near to medium term).

Most privatisation targets share several similar characteristics... Based on our observation, most privatisation targets share several similar characteristics, these include (i) low trading liquidity, (ii) low valuation, and (iii) under-researched.

About 1/3rd of the KLPLN components have the se characteristics. We did a quick search on KL Plantation Index components based on 4 criteria, namely (i) 6- month daily trading volume of of less than 0.5m shares, (ii) P/B of not more than 1x, (iii) Enterprise value (EV) of not more than RM40k/ha (planted), and (iv) limited or no research coverage. Our search results show that about 1/3 of the KL Plantation Index components (14 out of 43 companies) meet all our above-mentioned criteria (see Figure #2) as potential privatisation targets.

Potential privatisation aside, there may be more M&A activities in the pipeline…

We believe M&A activities among plantation players will remain robust, given:

1. The lack of available landbank for expansion, exacerbated by increasingly stringent certification process by RSPO, which may entice larger scale plantation players to expand their planted area via brownfield land acquisition instead of organic expansion;

2. Escalating cost pressure (amidst rising labour cost and labour shortage), which may result in smaller scale players exiting the oil palm plantation business by disposing their oil palm plantation assets to larger scale players. Relative to the smaller scale players, larger scale players tend to manage their production cost better due to economies of scale;

3. Rising appetite for land bank (for property development and urbanisation purposes), which may in turn drive land transactions. Case in point is Hap Seng Plantation’s recent move to dispose part of its landbank in Ladang Kawa (for RM76m or RM137k/ha), as the landbank is no longer economically viable (given its low yield resulted from high age profile) and deemed more suitable for property development (given its close proximity to town).

Maintain Neutral. YTD, CPO price averaged at circa RM2,550/tonne. While we are still holding the view that current high CPO price will unlikely sustain into the remaining months of 2020, full year average price will likely come in higher than our assumption of RM2,350/tonne; possibly averaging RM2,450-RM2,500/tonne. Pending a further review on the sector, we keep our assumptions for now at RM2,350- 2,400/tonne in 2020-21. We maintain our NEUTRAL stance on the sector unchanged for now. For exposure, our top pick is TSH Resources (BUY; TP: RM1.14).

Source: Hong Leong Investment Bank Research - 21 Sept 2020