Kwantas to weigh first payout in three years

This article first appeared in The Edge Malaysia Weekly, on November 27, 2017 - December 03, 2017.
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AFTER a two-year dividend drought, integrated palm oil producer Kwantas Corp Bhd may declare a payout this time around if it is successful in improving its financial health over the coming months.

A clearer picture of its progress could emerge when its first-quarter results are released this week. The last time Kwantas declared dividends was in its financial year ended June 30, 2015 (FY2015), when it distributed five sen per share.

“If our balance sheet improvement goals are met by June 30, the company will look at a dividend payout similar to the pre-FY2016 level,” it says in an email to The Edge.

Assuming a five sen per share payout in FY2018 too, dividends would amount to roughly RM15.6 million overall based on its existing share base. The group returned to the black in FY2017 after making losses for three consecutive years due to higher operating expenses. It reported a net profit of RM36.5 million on revenue of RM1.38 billion — its highest turnover in three years. The turnaround was thanks to better margins from selling crude palm oil (CPO) and a one-off gain of RM1.53 million from disposing of an oleo-chemical subsidiary in China.

The company aims to improve its balance sheet by lessening borrowings and reducing capital commitments to low-return assets. It also seeks to pay off a US$35 million loan by the first half of next year, it says.

As at Oct 31, 2017, the outstanding amount on the loan was roughly RM138 million, Kwantas adds.

The US dollar-denominated loan had come with a covenant requiring the company to maintain a current ratio of at least 1.0 by June 30, 2017, which led to the company closing a land sale earlier this year to raise cash.

As at June 30, Kwantas had an audited RM250.34 million in current assets against RM533.12 million in current liabilities, yielding a current ratio of 0.47. Its gearing level was at 0.45 times.

Management aims to reduce its gearing further to 0.2 times over the long run, it says.

To recap, the land deal signed in April is for the sale of a 3,791-acre parcel in Sabah to KUB Malaysia Bhd for RM100.45 million, which is at a 19.3% discount to the net book value. That said, Kwantas still books a net gain as its original investment back in December 1998 was RM20.52 million.

However, the sale is only expected to be concluded at the end of the year, which raised concerns at the time over the timing as missing the covenant deadline could lead to a default. The lender has since extended the deadline by a year to June 30, 2018.

“Kwantas targets to fully settle the said loan by the first half of 2018 through proceeds from the divestment, thus the (covenant requirements) are not applicable then,” it says.

Said divestment includes both the proceeds from the KUB Malaysia land sale as well as expected sales of further non-core assets. According to its annual report released on Oct 31, Kwantas has earmarked RM194.84 million worth of non-current assets as held-for-sale.

It expects to conclude the sales by mid-2018. According to Kwantas, the assets classified as held-for-sale include those under its plantation arm and two other subsidiaries that operate a bulking installation and refinery plant in China as well as an oil palm plantation in Malaysia.

Kwantas is controlled by the Kwan family with brothers Kwan Ngen Chung and Kwan Ngen Wah holding a collective 60.12% stake between them. Ngen Chung is the company’s managing director while Ngen Wah and two other siblings are executive directors.

Apart from the Kwans, the only other substantial shareholder in Kwantas is BNP Paribas Wealth Management with 17.69%. Its free float stands at 23.31%, according to Bloomberg data.

Kwantas was not traded last Thursday and had closed at RM1.39 on Tuesday, down 17.3% from its peak of RM1.68 in early June. Year to date, the counter has declined 7.33%, putting the company’s market capitalisation at RM433.23 million.

According to the latest revaluation of its properties and biological assets, Kwantas has net assets per share of RM4.07. It owns 26 estates across Sabah, Sarawak and Kalimantan that produced 375,624 tonnes of fresh fruit bunches in FY2017, up 8.4% year on year amid a recovery from lagging El Niño effects. The output accounted for 63.5% of crops processed by its three palm oil mills in the same financial year.

Overall, Kwantas’ land bank stands at 58,450ha, some 36.25% or 21,187ha of which are planted. In this planted area, 59.7% of the palms are between the ages of 16 and 25 years while those planted on 2,837ha are in the prime age of between 8 and 15 years.

In FY2017, Kwantas replanted 955ha in Sabah and Sarawak and expects to replant another 2,050ha in both states in FY2018.

Kwantas tells The Edge that it also expects to increase the proportion of planted area by five percentage points to 41.25% of its land bank in the same time frame. It is allocating about RM15 million a year for replanting.

Among others, Kwantas sees a better financial year in FY2018 — after returning to profitability in FY2017 — if its divestment plan is successful and if CPO prices remain favourable.

According to the latest data from the Malaysian Palm Oil Board (MPOB), the palm oil stockpile grew 8.4% month on month in October, the fourth consecutive monthly increase, to hit 2.19 million tonnes — the highest since January last year.

The growing stockpile, thanks to better-than-expected output, “may temporarily pressure CPO prices on the downside”, says Maybank Research in a Nov 13 note.

However, the research house expects production to taper off seasonally from November to February next year. If the rainfall in the looming northeast monsoon is heavier than usual, CPO prices could see a temporary lift in the first quarter of 2018, it says.

Maybank Research sees CPO prices averaging at RM2,700 per tonne this year compared with RM2,650 last year. Last Tuesday, CPO ended at RM2,560 per tonne, according to MPOB data. It peaked at RM3,344.50 in February.

The Kwantas management is expecting CPO prices “to normalise between RM2,600 and RM2,800 per tonne. The recovery and strengthening of USD, in the long run, would benefit the export of palm oil products to the global market”.