This article first appeared in The Edge Financial Daily on February 22, 2018

KUALA LUMPUR: Hap Seng Plantations Holdings Bhd is acquiring a 55% stake in smaller rival Kretam Holdings Bhd for RM1.18 billion to boost its plantation land bank.

In a filing with Bursa Malaysia, Hap Seng Plantations said it is acquiring the stake, comprising 1.28 billion shares, at 92 sen a share in cash.

Kretam's share price closed at 84 sen on Tuesday - its highest level since 1997. Trading in the stock was suspended yesterday at the company's request pending the acquisition announcement.

Hap Seng Plantations said the 55% stake acquisition will trigger a mandatory general offer for the remaining shares in Kretam. However, the group intends to maintain the listing status of Kretam after the general offer.

Hap Seng Plantations said it is buying 33.5% of the stake from Kretam's largest shareholder, Datuk Lim Nyuk Sang @ Freddie Lim, for RM716.99 million, and another 21.5% from Santraprise Sdn Bhd for RM460.79 million.

Upon completion of the acquisition, Hap Seng Plantations' total plantation land bank and planted area are expected to increase by 23,865ha or 59.2% and 19,623ha or 54.3% respectively.

"In line with its objective to increase its plantation land bank, the proposed acquisition represents an opportunity for Hap Seng and its subsidiaries to pursue their long-term strategies," said the group.

It added that it is acquiring Kretam as the latter's estates are strategically located and close to the group's existing estates, thereby allowing for greater economies of scale.

The exercise is also expected to improve the age profile of Hap Seng Plantations' oil palm estates - as Kretam's oil palm estates are within their prime ages of 11 years to 19 years - which in turn is expected to enhance revenue stream for the group in the medium- to long term.

With the capacity of Kretam's existing refinery of about 1,500 tonnes a day, the acquisition will also enable Hap Seng to venture downstream into the production and sales of edible oils, extending its value chain and operational efficiency, it added.

In May 2017, Hap Seng Plantations managing director Datuk Edward Lee Ming Foo said the group was looking at expanding its plantation acreage in Sabah.

The group - focusing on upstream activities - prides itself as one of the largest producers of sustainable palm oil in Sabah. Besides oil palm in its estates, the group has four palm oil mills with a combined capacity of 180 tonnes per hour.

Hap Seng Plantations boasts a land bank of 40,279ha in Lahad Datu, Tawau and Kota Marudu, with an average age of 15.3 years as at Dec 31, 2016. Of the total planted area of 36,145ha, about 90% are mature areas.

Kretam, meanwhile, is smaller by market capitalisation but is more of an integrated palm oil player.

Apart from oil palm plantations, the group has three oil mills with a total capacity of 135 tonnes per hour, a refinery with a capacity to process 1,500 tonnes of crude palm oil per day, a 300-tonne per day bio-diesel plant, and a 30,000-tonne per annum fertiliser plant.

However, Kretam's refinery division was loss-making for the first nine months ended Sept 30, 2017 (9MFY17), as a result of lower profit margin.

According to its latest annual report, Kretam has a total land bank of 23,865ha in Sandakan, Tawau and Lahad Datu, of which 18,425ha are matured areas.

For 9MFY17, Hap Seng Plantations turned in a net profit of RM88.87 million on revenue of RM391.19 million. Kretam registered a cumulative net profit of RM20.90 million on revenue of RM458.13 million.

Shares in Kretam have been heavily traded since the start of the year, and have risen 57% since closing at 53.5 sen on Jan 2. Kretam currently has a market capitalisation of RM1.96 billion, and at the current level, the stock is trading at about 2.08 times its book value.

Hap Seng Plantations last closed at RM2.56, with a market capitalisation of RM2.05 billion. The counter has been trading between RM2.45 and RM2.73 in the last one year.