Thursday 28 Mar 2024
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IJM Plantations Bhd (IJMP) is proceeding steadily with its plans to expand its plantation business in Indonesia, which saw the company recently announcing a rights issue to raise funds for landbank development.

IJMP executive director and general manager Joseph Tek Choon Yee tells The Edge that IJMP needs to grow its operations, and it is looking to do so in Indonesia where many Malaysian planters have headed in recent years.

“We need to expand our business and we’ve chosen Indonesia where land is more easily available. We’re looking at developing about 30,000ha to 40,000ha over the next several years,” he says.

IJMP’s plantation landbanks are located in Sandakan, Sabah, where it has a 30,000ha tract. The Indonesian acquisition, when fully developed, should raise its total plantation size to between 60,000ha and 70,000ha.

Between November 2006 and June 2007, IJMP acquired three companies in Kalimantan — PT Sinergi Agro Industri, PT Zarhasih Kaltim Perkasa and PT Primabahagia Permai — through which it took possession of 32,634ha.

The plantation group is also looking at a 10,200ha plot in Lampung, Sumatra, and has inked a sale and purchase agreement to take a 75% stake in PT Prima Alunga for the land acquisition.

The expansion programme makes IJMP one of the fastest growing planters in the country. It started out as a small joint venture between IJM and Koperasi Pembangunan Desai Talisai in 1985, with a small estate of 4,000ha in Desa Talisai. It was listed on the Main Board after taking over the listing status of Rahman Hydraulic Tin Bhd in 2003.

Although not among the bigger planters in the country, the acquisition of land in Indonesia would propel it into the ranks of medium-sized plantation companies. An analyst says though IJMP is not the biggest, its branding and earnings are well established, thanks to its IJM connection.

Tek says IJMP has been working on its project in Indonesia over the last two years and has spent RM100 million on the initial set-up and to establish nurseries. It drew down this amount from a RM200 million credit facility, which should be sufficient until early next year.

However, the overall cost of the development project is expected to set IJMP back by between RM600 million and RM700 million, and it cannot depend entirely on borrowings for the project, Tek says.

“We now have a RM200 million facility that we will use until early next year to fund the project, but its scale is very large as we are looking to double our landbank,” he says.

“We can’t depend on borrowings as we need to keep our balance sheet in shape. So, the next phase of the fundraising will be the rights issue.”

IJMP also has plans to borrow an additional RM200 million, which represents the third and final phase of its fundraising exercise.

At RM600 million, the development cost of IJMP would come up to about RM20,000 per hectare, while at RM700 million, it would be about RM23,000.

Tek says the cost of development will depend on the price of fuel, although the figures are still low compared with some of the plantation giants in the sector. For example, Sime Darby Bhd’s cost of development exceeds RM30,000 per hectare.

On July 8, the plantation company announced a two-for-eight renounceable rights issue, which is expected to raise some RM336.56 million from 160.27 million new shares at a par value of 50 sen each.

Subscribers for the rights, priced at RM2.10 per rights share, will receive a detachable warrant that is exercisable on a one-to-one basis into IJMP shares at an exercise price of RM2.62.

IJMP has also asked its parent company, IJM Corp Bhd, to provide an undertaking to subscribe for its full entitlement. IJM Corp has a 55% stake in IJMP and is the biggest shareholder. The second-largest stakeholder is the Employees Provident Fund, which holds an 11% stake.

With a relatively low gearing of about 4% as at FY2009 ended March 31, some analysts were asking why IJMP was undertaking a rights issue, which would dilute its earnings when it has ample room to gear up.

Bloomberg consensus has set the target price of the share at RM2.54, with only one house maintaining a “buy” call on the stock. Notably, AmResearch downgraded the stock to a “hold”, citing the dilutive effect of the rights issue.

The market responded negatively to the news of the rights issue, sending the stock tumbling for two days, although it has since recovered, outperforming the FBM KLCI. An industry observer says bargain hunters were in the market to pick up depressed stocks, and the drop in price for IJMP was the likely reason for the strong buying the following day.

He says IJMP, despite its relatively small size, has a strong corporate brand in its parent company.

“With everyone banking on commodities to pick up with the recovery in the economy, IJMP could be a good investment for the future,” he adds. However, he cautions that the outlook for crude palm oil (CPO) is still unclear.

Between July 8 and 24, IJMP picked up 11.9% while the FBM KLCI gained 8.1%. IJMP dropped 3.85% between July 8 and 10, which is when the rights issue was announced.

Tek says it is necessary for IJMP to retain a flexible balance sheet because there could be further opportunities in Indonesia: “If opportunities arise, we will gear up. The rights issue will give us a cash reserve, enabling us to do so.”

The reserve will also provide some buffer against fluctuating prices, which can be observed in the volatile movements of CPO and crude oil prices last year.

“We are in a long-haul project, so fluctuations [in the prices of the two commodities] will be there. It’s important for us to ensure we have the resources on standby to deliver on the project,” says Tek.

These opportunities, he explains, can arise from the development of the landbank in Indonesia as the laws there require planters to develop the surrounding area for the indigenous community under a “plasma scheme”.

If more land becomes available through the development of the scheme, Tek says IJMP wants to be in a position where it could buy up more land.

“The scheme has synergistic value for us in addition to being an initiative on the CSR [corporate social responsibility] side.” IJMP has planted about 1,000ha in Indonesia, but this is not expected to contribute to its top line until 2012. Tek says the company also has to construct an oil palm mill.

Meanwhile, crop output from its Sandakan operations dropped 9% in June this year due to high rainfall.

“Our June and July crop was from older trees, and the shortfall was more evident in the older palms,” Tek says. “However, two-thirds of our plantations comprise younger palms and we expect a good season come August and September.”


This article appeared in Corporate page of The Edge Malaysia, Issue 765, July 27- Aug 2, 2009

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