Background

Johor Plantations Group Berhad (JPG) was founded on 21 March 1978, under the name Yule Catto Plantations Sdn Bhd. The group was later rebranded as Johor Plantations Group Berhad on 27 Nov 2023. JPG primarily focuses on upstream oil palm operations and intends to expand into the downstream market. The group presently owns 23 oil palm plantation estates covering a total land area of 59,781 hectares (ha) and operates 5 palm oil mills (POMs). JPG is also engaged in trading, other support services, and the production and supply of renewable energy (RE).

IPO Statistic

The IPO entails a public issue of 464,000,000 new ordinary shares and an offer for sale of 411,000,000 shares at a retail price of RM0.84/share. Institutional price will be determined by a bookbuilding process.

Public Issue:

• 50,000,000 new shares for application by the Malaysian public.

• 27,500,000 new shares for application by the Eligible Persons.

• 386,500,000 new shares will be issued through a private placement to institutional and selected investors.

Main Competitive Advantages

1. Sustainable High Oil Yield

2. Long Track Record as An RSPO-Certified Producer

3. R&D Improved OER

4. Experienced Management Team

Valuation

We fairly value JPG at RM1.06 per share, based on CY25 PER of 14x, which is 20% discount to our sector target PER of 18x. We believe the discount is justifiable due to JPG's considerable debt obligations and the substantial capex needed for its replanting program.

Business Overview

JPG is principally involved in the upstream oil palm operations and is planning to enter the downstream market. The group currently owns 23 oil palm plantation estates, consisting of 22 in Johor and 1 in Pahang, with a total landbank of 59,781 ha and a total oil palm planted area of 55,904 ha, representing approximately 93.5% of the total land area of its plantation estates. The weighted average palm age is 12.9 years.

JPG also operates 5 palm oil mills (POMs) and all of the mills are Roundtable for Sustainable Palm Oil (RSPO) certified. The palm oil mills have a total FFB processing capacity of 295 tonnes per hour (tph) or 1.6mn tonnes/annum. In FY23, the group processed a total FFB of 1.3mn tonnes, representing around 80.2% utilisation rate. The group has recently upgraded the FFB processing capacity of its Sindora POM from 45 tph to 60 tph and increased the capacity per year from 260k tonnes to 396k tonnes.

We gather that around 24.1% of the total FFB processed were sourced from third parties in FY23, while the rest are from owned and rented plantation estates. Most of the CPO and PK are primarily sold to third-party downstream refineries in Malaysia for further processing into edible oils or oleochemical products and PK products.

Besides, JPG is also involved in trading and other support services such as trading of agricultural machineries, selling of germinated seeds and providing training and advisory services as well as the production and supply of renewable energy (RE).

Utilisation of Proceeds

The estimated gross IPO proceeds of RM389.8mn are expected to be utilised for the followings:

Key Competitive Advantages

1) Sustainable High Oil Yield

JPG’s oil palms consist mainly of prime mature oil palms (69.9%) that are in their peak production years while the remaining are young mature oil palms (14.3%). About 6.8% of its oil palms are immature (

The group has been able to sustain its high FFB yields of more than 20 tonnes/ha, higher than the MPOB benchmark average. Besides that, the CPO extraction rate of 19.9% - 21.0% is also comparable to Malaysia’s average OER. According to management, proper management with great efficiency, effectiveness and strategic locations of its POMs have helped to control and minimise transportation costs and FFB spoilage. These are the key factors leading to better yield performance.

2) Long Track Record as An RSPO-Certified Producer

JGP holds a competitive edge thanks to its extensive experience as an RSPOcertified producer since 2009. All JGP's plantation estates, whether owned or rented, have achieved RSPO certification for both POMs and FFB productions. This certification allows JGP to differentiate its products and command a premium over non-certified competitors for its CPO. By offering sustainable palm oil products that are traceable and RSPO-certified, JGP can effectively market its goods at a higher average selling price relative to the average price reported by MPOB.

Additionally, JGP proactively involves smallholders in Malaysia to obtain MSPO and RSPO certifications. This illustrates its dedication to sourcing RSPOcertified FFBs, which will enhance its ability to produce traceable and sustainable palm oil products in the future.

3) R&D Improved OER

Through extensive research and development efforts, JPG and MPOB have collaboratively achieved a significant milestone with the successful development of Clone P325. This clone has been officially recognised as an "elite clone," representing a preferred choice for planting material. Clone P325 demonstrates superior performance, yielding an average of 30 tonnes/ha of FFB annually, with an estimated OER of 28.1% and producing 8.5 tonnes/ha of CPO annually.

In comparison, standard DxP oil palms typically yield an average of 28 tonnes/ha of FFB annually, with an estimated OER of 23.1%, resulting in 6.6 tonnes/ha of CPO annually. This highlights Clone P325's remarkable advantage in productivity and efficiency. The commercialisation of Clone P325 is anticipated in 2027, with an initial offering of 60,603 ramets to the external market.

4) Experienced Management Team

The group is led by an experienced management team, consisting of its Managing Director, En. Mohd Faris Adli Bin Shukery, who has more than 19 years of experience in the plantation industry. He is supported by the Chief Financial Officer, Pn. Aziah Binti Ahmad and Key Senior Management who have more than 20 years of experience in their respective field and key expertise, industry experience, and in-depth knowledge of its business operations.

Key Risks

Too Dependent on Major Customers

JPG's revenue streams have shown a significant dependency on specific major customers, comprising 58.2%, 66.0%, and 77.7% of total revenue for FY21, FY22, and FY23, respectively. As of FY23, these top three customers alone accounted for 77.7% of total revenue. Consequently, any substantial decrease in purchases from these major customers would adversely impact JPG's business. Generally, the group does not engage in long-term contracts with its customers.

Unpredictable Weather Pattern

The upstream business is particularly vulnerable to weather conditions, which significantly influence both near and long-term production of FFB. Drought conditions can reduce FFB yield, whereas excessively wet weather can hinder fertilizer application, leading to lower fruit quality and impacting the OER. Additionally, heavy rainfall and flooding are anticipated to disrupt harvesting progress and cause delays in the evacuation of FFB.

Highly Volatile CPO and Palm Product Prices

JPG’s earnings are highly sensitive to fluctuations in CPO and FFB prices. Persistent low CPO prices can significantly harm profitability. It is worth noting that CPO prices are closely linked with soybean and crude oil prices. Consequently, CPO is indirectly influenced by external factors such as severe weather conditions in the US, Brazil, and Argentina, as well as geopolitical tensions and decisions regarding crude oil production by OPEC. These external factors can add to the volatility and uncertainty in CPO pricing, thereby affecting JPG's financial performance.

Increase in Operating Costs

Production costs can increase due to soaring fertiliser costs, an increase in minimum wages as well as recruitment costs.

Change in Government Policy and Regulations

The change in local government policy, import tariffs, taxes, and other import restrictions imposed by importing countries can affect the demand for CPO due to substitution effect (Soybean).

Foreign Labour Shortage

The palm oil industry relies heavily on foreign labor, primarily from Indonesia. Government restrictions on work permits could potentially lead to a shortage of foreign labor, thereby adversely impacting operations. Currently, the group employs a total of 4,780 estate workers, with 3,572 of them being foreign workers. These foreign workers constitute approximately 74.7% of the total field workforce employed on its plantation estates.

JPG’s revenue increased from RM1.0bn in FY20 to RM1.8bn in FY22, mainly attributable to increases in CPO and PK prices (2000-2022), despite lower sales volume of CPO and PK. However, the revenue for FY23 decreased by 28.4% YoY to RM1.2bn mainly due to lower volume of CPO and PK. Meanwhile, the CPO and PK selling price have also plunged by 22.9% and 30.9%, respectively.

In terms of profitability, JPG reported a profit increase of over 100% to RM344.8mn in FY21, driven by significantly higher ASP for CPO and PK, which rose 60.6% and 77.7%, respectively. The commendable performance continued into FY22, with profit rising further by 43.7% YoY to RM495.6mn, supported by strong palm oil prices and a lower effective tax rate of 11.9% (compared to 28.6% in FY21) due to a RM113.1mn waiver of real property gain tax by the Ministry of Finance. However, profit decreased sharply by 66.2% YoY to RM167.3mn in FY23, primarily due to lower CPO prices at RM3,989/tonne (- 22.9% YoY) and PK prices at RM2,223/tonne (-30.9%YoY), as well as higher interest rates and flooding on its plantation estates, which affected production volume.

Future Plans and Business Strategies

The Group’s Future Plans and Business Strategies Are as Follows:

1) Diversify Offerings by Venture Into Downstream

JGP is currently assessing opportunities to enter the downstream market, specifically in the refinery sector. This initiative aims to diversify its product range to encompass specialty oils and fats for food production and better manage commodity price volatility. By pursuing this diversification strategy, the group aims to strengthen its position as a fully integrated oil palm producer, thereby generating additional revenue throughout the entire value chain.

The group plans to build a RM446.7mn integrated sustainable palm oil complex on Pasir Logok Estate. A portion of the proceeds, approximately RM171.6mn, will be allocated to fund this project. The complex will include a POM, a downstream refinery, a kernel crushing plant, a bio-energy power plant, and an animal feedmill all situated in one location. This integrated setup will enable the group to streamline operations across the entire palm oil value chain, connecting estate operations, mill operations, renewable energy processing, and downstream refining, taking advantage of the proximity to its estates. The complex is scheduled to be commissioned and begin commercial operations by the 3Q of 2026.

The group has identified Fuji Oil Asia Pte Ltd as its joint venture partner (JPG Fuji Sdn Bhd) for its expansion into the downstream plantation business. JPG and Fuji Oil Asia Pte Ltd will respectively hold 51% and 49% of the issued share capital of JPG Fuji.

2) Expansion of Capabilities

To increase revenue streams, JPG intends to upgrade existing POMs or strategic acquisitions of additional POMs. As part of its strategy to expand production capacity and achieve growth targets, the group intends to establish a RM141.8mn POM within its integrated sustainable palm oil complex. This new facility will have an FFB processing capacity of 90 tonnes per hour.

3) Expansion of Plantation Estates

JPG plans to expand its oil palm plantation business by acquiring existing plantation estates in Johor. Additionally, the group may increase its supply of FFB by managing more estates for third parties. It also aims to explore opportunities for expansion into new geographical areas, provided such ventures are commercially viable and strategically complement its current operations

4) Enhancing Operational Efficiency

JPG is focusing on enhancing palm oil yields and reducing production costs to strengthen its profitability and sustainability. To achieve this, the company has launched the "Palm Product Yield 7.0 tonnes" initiative aimed at achieving yields of at least 7.0 tonnes of palm products per hectare. One strategy to increase the yields involves replanting old oil palms, particularly those over 25 years old, with higher-yielding planting materials such as KT clonal and improved DxP seedlings. Furthermore, JPG plans to continue replanting its estates with advanced planting materials developed through its research and development efforts. The company also aims to enhance production efficiency by integrating more mechanisation and digitalisation into its processes, specifically targeting increased production of CPO and PK.

5) Sourcing of RSPO-certified FFB

JPG plans to continue and expand its smallholder inclusion programme to assist more smallholders in applying for RSPO certification. It plans to continue to provide economic incentives to smallholders that sell RSPO-certified FFB to them due to the higher demand and higher profit margin for traceable and sustainable CPO produced from RSPO-certified FFB. As at the LPD, 1,432 out of 2,148 smallholders, or approximately 66.7%, have provided complete traceability information.

6) Advancing Sustainable Practices: Maximizing By-Products

The group plans to continue to incorporate sustainable principles into operations by maximizing the use of the by-products from its operations. The group intends to further refine excess biogas, generated but not utilised for internal power generation, into biomethane for sale as a natural gas alternative with equivalent energy capacity. JPG is currently constructing bio-CNG plants at its Tereh POM and Sindora POM, with plans to complete construction and commissioning by the end of June 2024. Commercial production of bio-CNG at these plants is scheduled to commence in July 2024. The estimated construction cost for these bio-CNG facilities amounts to approximately RM26.0mn, which will be financed through a combination of internally generated funds and external financing.

Outlook

According to an independent market research report by Glenauk Economics Sdn Bhd, included in the IPO prospectus, the demand for palm oil is projected to increase more rapidly than supply until 2032 due to constraints on expanding the area under oil palm cultivation. From 2032 onwards, supply growth is expected to slightly outpace demand, supported by increased production through replanting efforts and higher soybean oil supplies alleviating some pressure on palm oil. Despite this, stocks are expected to remain tight.

We expect the CPO price to average at RM4,000/tonne in 2024 and RM3,800/tonne in 2025. With soybean supply expected to rise in 2024, we believe it would be tough to paint a bullish price outlook for CPO due to the substitution effect. According to the United States Department of Agriculture (USDA), global vegetable oil production is expected to increase by 2.5% in 2023/24 and by 2.0% in 2024/25. The growth in 2024/25 is primarily driven by soybean and palm oil production, with increases also anticipated in olive oil and peanut production.

However, the premium of soy oil futures over palm oil futures has reduced from its peak of USD803/tonne to less than USD150/tonne recently, which falls within the typical range of USD 100 to USD 200/tonne. Therefore, palm oil remains relatively appealing as an alternative, to some degree. This perspective could help mitigate potential declines in CPO prices, in our view. We anticipate the spread to remain stable at the current level in the 2H of the year.

Balance Sheet

On a pro forma basis, the balance sheet is expected to improve from a net gearing of 0.7x to 0.5x, post listing and utilisation of IPO proceeds.

Dividend Policy

The group's dividend policy is to distribute at least 50% of the group’s net profit at the discretion of the Board.

Earnings Forecast

We expect the group to register a net profit growth of 24.6% to RM204.6mn for FY24. The higher earnings would be driven by higher palm oil prices, FFB production, and lower production costs. However, we expect earnings to decrease in FY25 due to lower palm oil prices and lower production volume growth due to more aggressive replanting program.

All in, our FY24 and FY25 earnings projections are premised on the key assumptions below:

• FFB production growth of 15.4% and 3.3% for FY24 and FY25 respectively.
• Decrease in the total annual plant utilisation rate to 81.8% and 80% for FY24 and FY25 respectively mainly due to upgrade in processing capacity.
• For 2024 and 2025, we assume the average CPO price to be RM4,000/tonne and RM3,800/tonne to derive our earnings forecasts
• Lower production cost is mainly due to improvement in FFB production yield at plantations and lower fertilizer costs.

Valuation

We fairly value JPG at RM1.06 per share, based on CY25 PER of 14x, which is 20% discount to our sector target PER of 18x. We believe the discount is justifiable due to JPG's considerable debt obligations and the substantial capex needed for its replanting program.

Source: TA Research - 24 Jun 2024