This article first appeared in The Edge Financial Daily, on May 23, 2016.

KUALA LUMPUR: While palm oil prices are set to rise, not many plantation groups stand to benefit as production is expected to decline due to the El Nino effect. For property developer MKH Bhd, however, a rise in palm oil prices is great news as it owns a 15,900ha oil palm estate in Indonesia.

Indeed, this is a good time for MKH, previously known as Metro Kajang Holdings Bhd, to take its plantation business to the next level as the property market remains lacklustre.

The group in fact is keen to boost its plantation portfolio in Indonesia, including a possible expansion into cassava farming. And it may eventually spin off its plantation business and list it in Indonesia or Singapore, to unlock its value.

In an interview with The Edge Financial Daily, MKH executive chairman Tan Sri Alex Chen Kooi Chiew said the management is actively seeking out more plantation land in East Kalimantan province where its existing estate is located.

“We have been approached by various parties for joint ventures and takeovers of large parcels of plantation land in Kalimantan, but we have been selective as sourcing good and productive land takes considerable effort,” Chen said, adding that this has slowed down the group’s plantation land acquisition plan.

Chen hinted that the group may soon finalise the acquisition of a 2,000ha plantation land in a low-cost area. He said the existing 15,900ha land cost only RM400 million when the group first bought it, but was worth RM1 billion in the previous financial year ended Sept 30, 2015 (FY15) and could be worth as much as RM1.1 billion in the current year.

Chen said that MKH is also considering teaming up with a listed partner to tap into the downstream business, producing edible oil, by this year.

The group is also eyeing opportunities of buying cassava farms in Indonesia to enlarge the group’s agriculture portfolio and provide the opportunity to export cassava to other countries, including China, in future.

Chen said that if MKH is able to find another piece of plantation land of between 2,000ha and 4,000ha in size, the group may proceed to spin off its plantation business as a separate listed entity.

For the first quarter ended Dec 31, 2015 (1QFY16), MKH’s plantation segment contributed about 20% of the group’s pre-tax profit , and Chen expects this to rise to 25% in 2Q.

It could rise further to 40% in FY17 if the nett crude palm oil (CPO) price reaches RM2,300 per tonne, he added.

Chen said the El Nino effect has not severely affected the group’s palm oil production in East Kalimantan, and the group remains on track to achieve its FY16 production target.

“Up to 2Q, we have accumulated production of 218,700 tonnes of FFB (fresh fruit bunches), which represented 53% of our annual budget of 413,000 tonnes of FFB,” he said, adding that the management had prepared the necessary irrigation works and other mitigation measures prior to the El Nino’s arrival in this region.

MKH had initially forecast an FFB yield per hectare of 29 tonnes for FY16, but the group has since set a higher internal target of 35 tonnes based on the CPO price forecast of RM2,300 per tonne.

“We expect CPO prices to range between RM2,400 and RM2,700 per tonne this year,” said Chen, who shared the general consensus that the price outlook for CPO remains  positive in view of the reduction in current production and stockpile, which was largely contributed by the El Nino weather phenomenon.

The positive outlook is also due to the announcement last month by Indonesia, the world’s largest palm oil producer, that it was studying a moratorium on new concessions for oil palm plantations, which would further limit the available land for the industry.

Besides, if Indonesia’s B20 biodiesel mandate and Malaysia’s B10 programme could be successfully and realistically implemented, Chen feels it would have a positive impact on the local consumption of CPO surpluses, thereby maintaining the price of CPO at a more sustainable level with lesser fluctuations.

Meanwhile, the group, which is set to achieve a record net profit for FY16, underpinned by its strong unbilled sales of RM827 million, has revised downwards its sales volume expectations for FY2016 to RM600 million from RM800 million in line with the current economic climate.

Nevertheless, Chen does not expect the slowing down of property sales to affect the group’s earnings for FY17, as the lower sales expectation this year will only be reflected in the financial results for FY18.

According to Chen, the unbilled sales of RM827 million are expected to support the group’s earnings visibility for FY16 and FY17. The group’s cumulative new sales as at 2Q amounted to about RM300 million.

“The earnings visibility of our plantation business within these two years may be able to support our strong earnings in the next two years,” Chen said, adding that the plantation business is able to help the group mitigate the risk of a soft property market.

He also said that the group aims to maintain a single-tier dividend of five sen per share or higher for FY16.

The group’s net profit for 1QFY16 doubled to RM61.67 million, from RM30.13 million a year ago. The figure for FY15 was RM86.96 million.

The group is expected to launch six property projects for FY16, with a total gross development value of RM948 million.

“We are constantly on the lookout for land with good development potential whether locally or overseas. Indonesia may be our first foreign market in property development,” Chen said.

The group’s land bank is primarily located in areas within Kajang, Semenyih and Shah Alam North, with developments expected to yield a potential gross development value of RM9.7 billion beyond FY16.