Leweko Resources Bhd, one of Peninsular Malaysia’s largest timber concessionaires, recently exited the plantation business by disposing of its three wholly-owned subsidiaries involved in oil palm cultivation for RM35.65 million cash, leaving the company with only its timber business.
The company is selling its four 60-year sublease oil palm plantations in Perak, totalling roughly 998ha (2,466.11 acres), at RM35,721 per hectare.
By comparison, Kuala Lumpur Kepong Bhd had disposed of seven parcels of adjoining freehold land in Perak, planted with eight-year-old palms, at RM42 million or RM21,000 per acre in January.
The question is, why is Leweko giving up its oil palm business when the price of crude palm oil (CPO) is rebounding and the timber industry is falling behind?
In response to queries from The Edge, Leweko’s executive director of corporate affairs, Ian Chung, points to the rise and fall in CPO prices. “What goes up must come down,” he says.
“Whilst most people are of the view that CPO price will remain high, going forward, they tend to overlook the fact that the corresponding production cost (especially of fertilisers and transport) has also increased substantially since 2006 and this eats into the profit margin,” he adds.
In a research note released at the end of March, Macquarie Research says it expects CPO inventories to rise again in the coming months, when full production resumes and exports continue to slow down.
Forecasting weaker CPO prices, the research house sees little justification in paying high multiples of 15 to 20 times one-year forward earnings for plantation stocks, in an environment where earnings are set to revert to the historical mean after two years of supernormal profits.
In a filing with Bursa Malaysia, Leweko says the proceeds from the disposal will be utilised as working capital for its timber operations and for investment opportunities that may arise from time to time.
According to Chung, the company is looking at investment opportunities related to its timber business. He adds that the disposal was to provide the company with the necessary financial resources to meet the challenges posed by the current challenging economic environment. Leweko is in a net debt position with total borrowings of RM18 million as at Dec 31 last year.
Based on a CPO price of RM1,600 per tonne and the company’s existing plantation cost structure, Chung says the division’s disposal price of RM35.6 million works out to 14 to 15 years of post-tax earnings on discounted cash flows and current income tax rate of 25%.
“Also, our palms are between 15 to 16 years of age and most of the acreage is due for replanting in 2017 or 2018,” he says, adding that Leweko will have net cash of about RM15 million upon the completion of the proposed disposal, with all things being equal.
All commodities, including timber, have their share of ups and downs. In the case of Leweko, whose core business has been timber-based activities for more than 30 years, it is worth noting that almost 90% of its revenue and assets are derived from and employed in its timber operations.
“The company still has significant forest concessions and a secure supply of timber logs. Harvesting has been deferred for the time being due to the poor selling prices but there will be substantial profits when timber prices recover. From the production viewpoint, Leweko also has a competitive advantage as it is one of the few KOMO® and Forest Stewardship Council (FSC)- certified timber producers in Malaysia,” Chung says.
KOMO® is a private quality mark that is compliant with the EU’s wood quality standards and commands a premium pricing of at least 70%. Meanwhile, FSC is an independent, non-governmental, non-profit organisation established to promote the responsible management of the world’s forests.
Chung reckons that 2009 will be a very tough year for the timber industry and the speed at which it recovers depends very much on the success of stimulus packages implemented in countries where Leweko exports its products.
“However, we have been in the timber business long enough to know that the market will eventually bounce back and in this context, we expect the market volume correction in Europe to level off by the end of 2009.
“At the same time, we have noted a pick-up in demand in the US while the sales of our new products in other regions, although not significant, were quite positive,” he says, adding that the company is most likely to see profitability by 2010 and hence pay dividends, assuming there is no further downturn worldwide.
Leweko posted a net loss of RM5 million in FY2008 ended Dec 31 compared with a net profit of RM15.5 million a year earlier. This was because of the lower sales volume registered by its logs and timber products and timber harvesting and logging contracting divisions.
Chung says the company will take steps to address the drop in the volume of its traditional products shipped to Europe by expanding its product range, among others. It will also broaden its customer base in regions where it does not have a presence, such as the Gulf states, India and North Asia.
“We will continue to focus on FSC and Malaysian Timber Certification Council-certified timber and quality/performance-certified timber products with international certifications such as KOMO® and Instituto Floresta Tropical, which usually fetch much higher prices than ‘uncertified’ timber.
“These products, which are environmentally acceptable, will also ensure that Leweko remains relevant in the future as the world becomes more environmentally-conscious,” he adds.
Furthermore, Leweko’s recent move to acquire a 51% equity interest in SCK Wooden Industries Sdn Bhd will help the company in expanding its downstream integration and product range.
“SCK’s solid and engineered hardwood flooring, which is highly regarded in Italy and the US, uses non-Malaysian hardwood species such as Burmese teak, white oak, doussie and iroko. These products complement Leweko’s existing products, which are principally derived from tropical hardwood sourced from Peninsular Malaysia.
“At the same time, Leweko and SCK will leverage each other’s marketing network to open up new markets for each other’s products,” Chung says.
This article appeared in the Corporate page, The Edge Malaysia, Issue 750, April 13-19, 2009.