Is Boustead Plantations’ RM397m land buy worth it?

This article first appeared in The Edge Malaysia Weekly, on August 13, 2018 - August 19, 2018.
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AT RM397 million, Boustead Plantations Bhd’s proposed land acquisition in Sabah looks likely to add some short-term strain to the planter’s cash flow when completed.

While the purchase will increase its existing planted area by about 6% — and grow its total land bank by about 5% — the oil palm trees on the acquired land are old at an average age of 18.7 years.

So the odds are the acquisition will add to Boustead Plantations’ finance costs without a corresponding boost to income given the low-yield trees.

Furthermore, with 58.75% of the new plantation area comprising oil palm trees that are past their prime at over 20 years old, a replanting programme will have to be on the cards.

This means additional capital expenditure and a longer wait to recoup the investment in the land. Oil palm trees generally enter their prime production years from the age of 10.

In response to questions from The Edge, the company says via email that replanting will only commence on a staggered basis from 2021.

Although the latest acquisition will not improve earnings immediately, Boustead Plantations says it is taking a long-term view as “the plantation business is not a short-term one”.

Note that the company’s new estates are strategically located within its existing plantations in Sabah.

“While the land may not be as productive as our current estates, we recognise its inherent potential, which will provide economies of scale in the long run,” it says.

Boustead Plantations adds that taking over the mill on the land will save it from having to build a new one for the estates in the area.

To recap, the purchase comprises 4,915.25ha spread across 17 plantations and a 75-tonnes-per-hour mill. Some 4,444ha of the land are planted.

Boustead Plantations currently has a total plantation land bank of 93,417ha, of which 74,985ha are planted.

The planter signed the sales and purchase agreement for the acquisition two weeks ago and is expected to conclude the deal by the first quarter of 2019.

The purchase price translates into roughly RM79,216 per planted hectare, says Maybank Research in an Aug 2 note. While acknowledging the need to replenish land bank, it considers the acquisition price “excessive”, given the oil palm trees’ age profile.

“This is one of the highest prices recorded in the industry in recent years. This purchase will unlikely be earnings accretive in the foreseeable years,” the research house says.

Boustead Plantations has said that an independent valuer appraised the market value of the plantation land at RM393.3 million, which means it is paying a 0.94% premium.

The company plans to borrow RM350 million for the acquisition and fork out the rest from internal funds. The borrowings will raise its net gearing to 0.24 times based on back-of-the-envelope calculations.

By comparison, in its first quarter ended March 31 (1QFY2018), Boustead Plantations had RM334.03 million of short-term borrowings but no long-term borrowings. Its cash balance stood at RM179.41 million. Its balance sheet as at March 31 showed a gross gearing of 0.12 times. An addition of RM350 million to its borrowings would lift gross gearing to 0.24 times.


Dancing to CPO volatility

The finance cost of the acquisition will add to the planter’s already high production cost, making its earnings more susceptible to fluctuations in crude palm oil (CPO) prices.

Last year, its average palm oil production cost was RM1,731 per tonne, according to its 2017 annual report. Analysts say its production cost is just below RM2,000 per tonne.

Add to this shareholder expectations of high dividends and the planter may be walking a financial tightrope if it runs into bad luck as far as CPO prices are concerned next year.

“While current market conditions are tough, our proven track record demonstrates that the group is well prepared to weather these challenges. To mitigate the impact of current weak CPO prices, we are focusing on improving efficiencies and enhancing productivity,” says the company in response to questions.

In 1QFY2018, Boustead Plantations saw its operating income fall 81.43% year on year to RM8.8 million — its lowest quarterly operating income since listing in June 2014. Revenue fell 18.21% to RM154.6 million.

Operating cash flow for the quarter was RM34.4 million, down almost two-thirds year on year. Its high cash balance of RM179.41 million was due to a RM194 million drawdown from revolving credits in 1Q.

In its filing with Bursa Malaysia, the planter says the drop was mainly due to lower prices for palm oil products. An 8% increase in the output of fresh fruit bunches in the quarter could not offset the company’s lower CPO average selling price of RM2,491 per tonne — a 21% year-on-year drop.

Malaysian Palm Oil Board (MPOB) data shows that the monthly average CPO price for local delivery ranged from RM2,426.50 to RM2,488 per tonne in the first three months of the year.

Between April and June, the monthly average fell to RM2,418 to RM2,324 per tonne based on MPOB data. The July average was RM2,215 per tonne.

This downward trend does not bode well for Boustead Plantations’ 2QFY2018 earnings expected later this month. For shareholders, a recurring question is the sustainability of the company’s high dividend payout in recent years, which it had been supplementing with land disposals.

Higher finance costs plus squeezed operating cash flow could mean less money to return to shareholders barring any land disposal gains.

When asked if the company had considered conserving cash by reducing dividends this year, it says “dividend payments are subject to the company’s ability to pay” in consideration of expansion plans and other needs.

The company’s stated dividend policy is to pay at least 60% of its audited net profit for the year, excluding income from associate companies, unrealised income and exceptional non-operational gains that could be reinvested.

In reality, its total annual dividend payout has exceeded net profit in some years, boosted by one-off gains from strategic land disposals. Between 2013 and 2017, its dividend payout was more than the net profit recorded in three financial years.

The company expects to conclude the sale of 138.89ha from its 667.8ha Malakoff Estate for RM139 million in 3QFY2018.

“We believe Boustead Plantations will monetise more strategic lands to fund this acquisition and appease shareholders with more special dividends,” Maybank Research says in its Aug 2 note. 

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