Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily, on May 3, 2016.

 

KUALA LUMPUR: After a challenging two years marred by floods and low crude palm oil (CPO) prices, plantation companies may have to ride through a more complex year. They are faced with dampened demand from a projected slower global economic growth, a freeze on recruitment of foreign workers, and a predicted strong El Nino phenomenon.

El Nino may, however, also serve as a silver lining for the industry. According to Oil World (ISTA Mielke GmbH) executive director Thomas Mielke, CPO prices are projected to rise as the abnormal weather ravages plantations and subsequently pull down production rates, with a forecast of up to RM3,000 per tonne within the first half of this year.

For small planter Astral Asia Bhd, the current scenario is viewed as a boon. It plans to increase its land bank as it expects more investors and companies to cash out from the palm oil industry.

“When CPO prices were trading high [in the RM3,000 to RM4,000 per tonne region], it was impossible to get land.

“Everybody was holding onto their land, no one was selling. Now that CPO prices are relatively down, people are selling [their] land. Some people want to cash out,” Astral Asia director Lim Guan Shiun told The Edge Financial Daily recently.

“That is the reason why we are exploring the land bank now. When we increase our land bank, we increase our revenue and therefore, earnings,” he added.

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Astral has in fact already scouted a potential acquisition in Sarawak of about 35,000 acres (14,163.99ha) and is deliberating on the viability of the project owing to its terrain and soil condition.

The group’s desire to look for more land is understandable. It has about 10,000 acres of plantation land, all of it located in Pahang.

As floods at the end of 2014 ravaged the east coast of peninsular Malaysia and east Malaysia, Astral experienced a significant drop in production rates as the cash crop in its estates withered.

Production has been sliding since the year ended Dec 31, 2014 (FY14) after three years of steady increase to 57,698 tonnes in FY13. In FY15, production fell to 46,020 tonnes from 49,918 tonnes in FY14.

Astral has been in the red for the past two years. Net loss widened to RM5.41 million in FY15 or 4.51 sen per share, from RM717,000 or 0.6 sen per share in FY14, on the back of lower production, lower revenue and higher replanting costs. Revenue slipped 14.8% to RM24.58 million from RM28.85 million.

Astral currently sells its fresh fruit bunch to local palm oil mills and transporters. If it gets to increase its land bank, it will have to venture into the downstream palm oil business, Lim added.

“With only 10,000 acres at the moment under the Astral group, it is too small for us to set up a palm oil mill,” he said. “But with the additional land, we may need to establish a palm oil mill.”

Astral corporate finance general manager Leonard Hoon Hui Kit said the company will have no problems clinching bank loans as its gearing is low.

Astral’s 12-month rolling gearing is 2.83%. The company’s cash of RM15.29 million is lower than its borrowings of RM19.4 million as at 4QFY15.

Earlier this year, the company proposed a nine-for-two bonus issue of 539.99 million shares after it carried out a revaluation of its subsidiaries, whereby the value of the assets held by its subsidiaries has increased over the years.

“That is one reason why we proposed the bonus issue of shares. We also proposed the bonus issue of shares to reward shareholders,” said Lim.

From the corporate side, Astral will see a larger capital base that it can leverage on should it acquire more land.

The exercise, to be completed by the second quarter of this year, will see Astral’s paid-up capital increase to RM131.9 million from the current RM23.9 million and improve trading liquidity and marketability of its shares.

Astral’s share price has been on the rise since Jan 15, reaching a five-year high on April 11 at RM1.94.

Lim said the company expects to return to profitability this year, on the back of the projected higher CPO prices, as well as cost-cutting measures that it had implemented since its plantations were hit by the floods at the end of 2014.

He said higher CPO prices would offset lower production due to the El Nino effect.

Astral Asia derived 97.7% of its revenue in 2014 from the operation of its oil palm estates.

Lim said for 2016, the group may have to bolster the order book of its small construction segment to weather the challenging operating environment.

The company, he said, is bidding for projects in the public sector, with a focus on the East Coast region.

Astral has also purchased a 0.87ha freehold property in Bangsar for RM7.5 million that it hopes to develop into a three-storey commercial building. It has also begun infrastructure work on the land acquired to establish the Kuantan Hi-Technology Park, he added.

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