FALLING rubber prices do not augur well for Greenyield Bhd, which has rubber plantations in Kelantan.

The November delivery contract for SMR20 rubber, one of the main grades favoured by tyre makers, was traded at RM4.62 per kilogram on Oct 9, a 14% decline from RM5.37 in early August. On the same day, centrifuged latex prices fell to RM3.70 a kilogram — its lowest level since June 2009.

Apart from the lower rubber prices, Greenyield faces razor-thin margins compared with companies involved in oil palm cultivation.

But Greenyield’s share price doesn’t reflect the gloomy prospects. In fact, the stock has rallied 82% this year. It gained 30% in the past two months alone to an all-time high of 46.5 sen on Sept 29. It closed at 42 sen last Thursday.

Likewise, its earnings are higher. For the financial year ended July 31, 2014 (FY2014), revenue rose 8.4% year on year to RM51.78 million. Net profit came in higher at RM6.29 million compared with RM5.24 million the year before.

While Greenyield did not disclose the segmental breakdown of its profits, the y-o-y profit margin improvement from 10.9% in FY2013 to 12% in FY2014 may have been largely due to the growing contribution from its plant pots business.

The group’s earnings growth came from its two core businesses, namely fertiliser manufacturing and plant pots, both of which offer fatter margins and little exposure to the volatile commodity prices.

In a reply to The Edge, Greenyield says its immediate future lies in these two segments.

The current unfavourable operating environment may put the group’s plans to grow its rubber planting business on hold. But it stresses that it will still retain its core speciality in the plantation sector.

Greenyield is in a joint venture that has been granted the rights to cultivate rubber on a plantation in Kelantan for a 50-year period. It owns a 30% stake in the JV, which owns 2,000ha, of which 1,600ha has already been planted with rubber.

It also wholly owns 400ha for rubber plantation.

“The group will continue to look for more suitable land to cultivate rubber and oil palm. However, the prospect of the rubber plantation sector will remain very challenging due to the prolonged depressed selling price of rubber in the international market,” it says.

For its fertiliser business, Greenyield intends to expand into the manufacturing of slow-release fertilisers, controlled-release fertilisers (CRF) and organic fertilisers.

“The group has thus far been focusing heavily on the rubber sector. Moving forward, we see the need to diversify and develop products and inputs for other agricultural sectors, in particular the oil palm plantation and horticultural sectors.”

Apart from planting, Greenyield has a substantial presence in the vegetative growth stimulant segment. Through its R&D division, the group owns several patents for agricultural products, such as a specially formulated CRF, a gaseous stimulation system and the Ethephon Plus brand of chemicals designed to enhance the latex flow of rubber trees.

Interestingly, Greenyield is also aggressively expanding its plant pot business, which is already a major contributor to its net profit. It says the coloured plant pot offerings are a major hit in export markets such as the US and Europe and provide excellent margins relative to its other segments.

“We are also looking at all available avenues to penetrate the South American and Asian markets,” it says.

Underlining this division’s importance, Greenyield has moved to acquire a parcel to increase its manufacturing capacity for plant pots as well as other agricultural products. On Sept 10, the group announced an agreement to acquire a 2.63-acre vacant parcel in Kuala Langat for RM3.56 million.

Given its cash position of RM11.85 million as at July 31, coupled with a recent RM10 million loan from HSBC, the group appears to have adequate funds to undertake an expansion to boost its revenue base.

Despite the promising growth catalysts, one main concern is that the rubber plantation segment could continue to be a long-term drag on Greenyield’s overall earnings, particularly if the commodity’s price slump continues. Its main export markets in the West also comprise countries that are experiencing economic stagnation, which could affect the sales growth of its products.

“We believe that 2015 will continue to be a challenging year due to the prevailing economic condition in European countries as well as the decline in rubber prices. We are in the process of reviewing our strategic business plan and thus far, we remain cautiously positive,” the group says.

The previously little-known stock is currently trading at a price-earnings ratio of 22 times on earnings per share of 1.88 sen. The spike in its share price has raised a number of eyebrows and prompt many to wonder what could be brewing in the company.

However, Greenyield says it is not aware of any development that may have contributed to the recent jump in its share price.

This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.

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