This article first appeared in The Edge Malaysia Weekly on March 25, 2019 - March 31, 2019

EKOVEST Bhd’s acquisition of a 23.4% stake in PLS Plantations Bhd from its largest shareholder, Tan Sri Lim Kang Hoo, has raised eyebrows, given that low commodity prices currently have caused many plantation companies to suffer losses.

With PLS Plantations slipping into the red as at Dec 31, 2018, some shareholders reacted negatively to the acquisition. Since the deal was announced on March 12, Ekovest’s share price has dropped by 11.86% , closing at 52 sen last Thursday.

However, Lim, who is also the largest shareholder of Ekovest, believes the plantation business will one day become another valuable source of revenue for the group, reducing its dependence on government spending on infrastructure and guarding against any change in policy.

“What we are planning is to diversify Ekovest’s income streams. So, let’s say if the government acquires our highway concessions, we will have this plantation business to fall back on to provide us with steady income. I think it is important for Ekovest to diversify its income streams,” he says in an exclusive interview with The Edge.

The question is, can PLS Plantations become a meaningful source of income for Ekovest?

To recap, Ekovest acquired the PLS Plantations stake from Lim last Monday for a total cash consideration of RM76.5 million, which works out to RM33,254 per planted hectare, which is close to the valuation of other plantation companies with a similar market capitalisation, according to the group.

What is of concern, however, is that PLS Plantations is a loss-making company. It registered a net loss of RM19.4 million for the financial year ended March 31, 2016 (FY2016), RM11.5 million in FY2017 and RM5.24 million in FY2018.

For the nine-month period ended Dec 31, 2018 (9MFY2019), PLS Plantations reported a net loss of RM6.72 million, compared with a net profit of RM8.27 million a year ago.

At a press conference after an extraordinary general meeting to seek shareholders’ approval for the acquisition of a 70% stake in Dulai Fruit Enterprise Sdn Bhd — a downstream durian product producer — by PLS Plantations, Lim had said he was confident the company would turn around in FY2020.

“Commodity prices go up and down, and we know the business well. I don’t need to be an expert to turn the business around. The profits will automatically come up when the price goes up to RM3,000 per tonne,” he tells The Edge.

He firmly believes commodity prices will rise, although he is uncertain when that will be.

“Whether or not prices go up, we already have more than 13,636ha that are mature with an age profile of six to seven years. A lot of money has been invested,” he says.

In its financial year ended June 30, 2018 (FY2018), Ekovest recorded a net profit of RM103.6 million, a 10% decline from FY2017. This was due to a drop in profit from its construction business as the Duta-Ulu Kelang Expressway (DUKE) Phase 2 has been completed.

The construction business contributed 45% to the group’s operating profit of RM372.9 million while about 30% came from the toll concessions. The property development business contributed the bulk of the remaining 25%.

Apart from the slow property market, the future of Ekovest’s highway concessions is also uncertain. The Pakatan Harapan government has started negotiations with Gamuda Bhd to acquire all the highway concessions the group owns.

According to Lim, Ekovest has had a few meetings with the government on the DUKE concession. The government wanted to know Ekovest’s cost for building the highway and how much was raised in bonds to finance the project.

Asked whether the group will approach the government to negotiate a deal for the highway concessions, Lim says it has not come to that stage yet. “We will make a decision regarding the highway once we come to that juncture,” he adds.

Ekovest has also received a letter of acceptance from Kuala Lumpur City Hall (DBKL) for improvement and beautification works under Package 2–Taman Titiwangsa for the River of Life Project (Phase 2) worth RM99.9 million.

The package, which will require Ekovest to clean and beautify a 3km stretch of the Gombak River, will kick-start the multibillion-ringgit KL River City project. Ekovest is currently finalising the Package 2–Taman Titiwangsa  contract with the government.

Meanwhile, in its financial year ended March 31, 2018, PLS Plantations’ operating profit was only RM741,000. It is clear the plantation group will need to produce more palm oil, timber, durian and other cash crops before it can contribute meaningfully to Ekovest’s bottom line.

According to PLS Plantations’ 2018 annual report, it has two 60-year concessions to manage Ladang Hutan Ulu Sedili (LHUS) in Kota Tinggi, Johor, covering a total of 35,223ha. Of this, about 8,000ha have been planted with oil palm.

Some 2,450ha are planted with various types of timber trees while durian plantations take up about 18ha. The group also has over 2,900ha in Mersing planted with oil palm, and another 716.6ha with rubber trees.

Lim says PLS Plantations will expand the business by forming joint ventures with other landowners or acquiring more leases. Other cash crops as well as bee farms could also be introduced.

“We look at the long-term value of the business, and we are going to expand into other agricultural products as well as cash crops, and even fish and prawns. We have contract farming for watermelon, honey, all kinds of products that we will introduce in the plantation area,” Lim explains.

For starters, the acquisition of the 70% stake in Dulai will provide PLS Plantations with a guaranteed profit of RM10 million over the next three financial years. It will also expand its product range to include frozen whole durian.

In a press release on the Dulai acquisition, Lim said post-acquisition, PLS Plantations aims to command a substantial share of the market for the export of downstream durian-based products, as well as expand its durian plantations to meet growing demand.

Nevertheless, he admits that the plantation business requires a long gestation period before it can turn in a profit. However, he says he always takes a long-term view when it comes to running a business, as proved by his vision of the Danga Bay area in Johor.

Iskandar Waterfront Holdings Sdn Bhd — a joint venture between Lim’s Credence Resources Sdn Bhd, Iskandar Investment Bhd and the Johor government — is the master developer of Danga Bay.

“When I first got to Danga Bay over 20 years ago, the water was blacker than my trousers, and it was very smelly. Who would have believed that I would be able to transform it into a waterfront area? Nobody believed that the area would one day become an economic corridor for Johor,” Lim remarks.

Will he be able to turn PLS Plantations into another success story that can become a meaningful contributor to Ekovest in the long run? Only time will tell.

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