This article first appeared in The Edge Financial Daily, on October 15, 2015.
UNITED MALACCA BHD
THE first plantation company we will look at is the low-profile United Malacca Bhd (UMCCA) (Fundamental: 2.55/3, Valuation: 2/3). The company owns two palm oil mills and 22,411ha of planted land bank in Peninsular and East Malaysia.
As most of its profits are derived from selling CPO produced by its estates, UMCCA is considered an upstream plantation company.
We like UMCCA for its strong fundamentals and young tree age profile. It also stands to benefit from the recent rally in CPO prices. Despite this the stock is down 11.6% y-o-y, providing investors with an attractive entry level.
UMCCA currently trades at an undemanding 0.76 times book with a decent dividend yield of 2.6%. It has net cash and equivalents of RM199.6 million which equates to 15.6% of the company’s RM1.28 billion valuation.
Although its P/E of 23 times (excluding cash) appears high, this could be explained by the growth potential from its young crop of trees, which have an average age of 9.8 years. Trees typically reach prime production from 8 to 15 years.
In 1QFYApr2016, the company registered strong FFB production growth. Output jumped 12% y-o-y to 90,165 tonnes. However, the lower average selling prices for CPO (RM2,220/mt) and palm kernel (RM1,518/mt) resulted in plantation profits increasing by only 5% to RM13.8 million.
Nevertheless, if the rally in CPO is sustainable and FFB production continues growing, the company should perform better in the coming quarters.
The company is backed by Singapore’s second largest bank, OCBC Ltd, which ultimately holds the largest stake at 14.1% followed by Aberdeen Asset Management at 13.5%
Moving forward, UMCCA has committed RM57 million to construct a new mill in Keningau, Sabah that will boost annual processing capacity by 200,000 tonnes. The company has also allocated RM22 million to upgrade its Bukit Senorang mill. Both of these capital expenditures will be funded using internally generated funds.
