THE PAPUA NEW GUINEA (PNG) government has given Sime Darby Bhd’s proposal to acquire New Britain Palm Oil Ltd (NBPOL) its blessing. The question is, will Kulim (M) Bhd, which will be selling its 49% stake in the Papuan palm oil producer, distribute all the proceeds from the disposal to its shareholders?
Last Thursday, Sime Darby surprised the market by announcing that its subsidiary, Sime Darby Plantation Sdn Bhd, intends to make a cash offer of £7.15 apiece for all the voting shares in NBPOL. Note that this was just a week after Sime Darby said it was not proceeding with the acquisition following the expiry of the exclusivity period agreed between the parties.
Given that Kulim had previously distributed the entire RM1.16 billion proceeds from the disposal of its stake in QSR Brands Bhd and KFC (M) Holdings Bhd, the market appears to believe it will do the same this time around.
Kulim’s shares rose 4.62% to close at RM3.40 last Friday.
However, an MIDF Research analyst opines that Kulim needs to hold on to some of the proceeds to expand its businesses, especially in the plantation segment. This is because the disposal of NBPOL will leave a big hole in Kulim’s future earnings.
“Kulim needs to use the proceeds for capital expenditure. It needs to keep some of the money to expand its plantation business because NBPOL contributes a huge part of the segment’s profit,” the analyst tells The Edge.
Kulim’s plantation businesses in PNG and the Solomon Islands contribute about 30% to the segment’s operating profit. The operating profit of the plantation segment is bigger than the group’s total operating profit (see table).
In 2013, NBPOL contributed 70% and 65% of Kulim’s fresh fruit bunches (FFB) and crude palm oil (CPO) production — Kulim produced 563,984 tonnes of FFB and 180,664 tonnes of CPO.
“The planned divestment of NBPOL may significantly affect Kulim’s plantation performance as 65% of the group’s FFB production was contributed by the operation in PNG and the Solomon Islands. If the sale of NBPOL goes through, we expect Kulim’s earnings growth in the near term to be muted,” states MIDF Research in a Sept 19 report.
The research house says that part of the proceeds from the NBPOL sale will be utilised to finance the development of the newly acquired 40,645ha greenfield plantation land in Central Kalimantan, Indonesia. Kulim targets to plant 400ha by end of this year, notes MIDF Research.
However, as the Central Kalimantan land is a greenfield project, Kulim will not reap much from it for at least the next two to three years. Thus, Kulim needs to find a way to plug the hole if it wants to maintain its level of earnings, says the analyst with MIDF Research.
Nevertheless, others expect Kulim to distribute the entire proceeds to its shareholders. This is because its largest shareholder, Johor Corp Bhd (JCorp), with a 60.3% stake, would want the proceeds to be distributed so that it can pare down its debts.
While JCorp has a large portfolio of assets, it also has huge debts. Besides QSR and KFC, JCorp owns stakes in Damansara Realty Bhd, KPJ Healthcare Bhd, Damansara Assets Sdn Bhd, Johor Land Bhd and Tanjung Langsat Port Sdn Bhd, among others.
As at Dec 31, 2013, JCorp had RM8.63 billion of property, plant and equipment, RM3.55 billion in investment properties and RM1.27 billion of investment in joint ventures. The group had cash and bank balances amounting to RM1.11 billion last year.
On the other side of the balance sheet, short and long-term borrowings stood at RM1.63 billion and RM6.93 billion respectively.
Another analyst says he sees the likelihood of the proceeds from the sale of NBPOL to be distributed to Kulim’s shareholders via a special dividend, amounting to about RM2.20 per share.
“Recall that Kulim paid a special dividend of 93 sen when it disposed of its stake in QSR and KFC in 2012,” he says.
The analyst points out that if Kulim needs to acquire new assets or businesses to plug the hole left by NBPOL, the group could easily raise the funds. As at June 30, 2014, Kulim’s gearing stood at 37.7%.
It had cash and bank balances of RM248.9 million as at June 30, 2014, while total loans and borrowings stood at RM2.03 billion. However, its borrowings are also expected to go down, as about 40% of the total was NBPOL’s debts.
Besides its plantation business, Kulim also has shipping and oil and gas-related businesses. The proposed listing of its shipping arm, EA Technique (M) Bhd, could provide greater financial flexibility for Kulim to pursue its investment strategy, says MIDF Research.
While it will be good news for Kulim’s shareholders if the group decides to distribute the proceeds from the sale of NBPOL, there is a chance it may not do so, or may not distribute the entire amount to shareholders. If the latter happens, it will be hard to justify the almost 5% jump in Kulim’s share price last Friday, notes the analyst with MIDF Research.
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NBPOL deal long-term positive for Sime Darby Sime Darby Bhd has made an offer of £7.15 (RM37.34) per share for New Britain Palm Oil Ltd (NBPOL). Sime Darby’s offer is said to be around 10% higher than that of the other bidders, say sources. The question is whether Sime Darby will be overpaying for the acquisition, at an 85% premium of NBPOL’s closing price of £3.87 per share traded on the London Stock Exchange (LSE) on Oct 8, the last trading day before the announcement. According to Maybank Investment Bank Research, the quality of NBPOL’s assets and management, scarcity of landbank, and the high cost and high risk of greenfield development, led to the proposed acquisition. Besides being 100% certified as a sustainable palm oil producer by the Roundtable of Sustainable Palm Oil (RSPO), NBPOL will provide a gateway for Sime Darby’s expansion into Papua New Guinea (PNG), says the investment bank. The government of PNG has stated its intention to hold a 30% stake in NBPOL, pursuant to the privatisation of the company off the LSE. NBPOL will be relisted on either Bursa Malaysia or the Singapore Exchange. “The offer price translates to an earning value per mature hectare (EV per ha) of RM84,200, or about a 15% premium to recent transactions in Malaysia. On its short term financial impact, we are neutral to slight negative on the acquisition.” The EV per ha of RM84,200 is the highest offered for a listed entity so far. Just last month, Felda Global Ventures Holdings Bhd’s offer for Asia Plantations Ltd worked out to an EV per ha of RM75,000, according to CIMB Investment Bank Research. It is worth noting that NBPOL’s estates recorded an average fresh fruit bunch yield of 23.5 tonnes per ha and an oil extraction rate of 22.5% over the past five years, which is superior to most of its peers, added CIMB in a report last Friday. “We are long term positive on the deal given the potential synergies and opportunities in Papua New Guinea for future expansion. Sime Darby gains an immediate foothold in this new market [with the acquisition],” says Maybank IB. NBPOL has over 78,000ha of planted oil palm plantations with a further 10,000ha for future planting, over 7,700ha of sugar cane plantations, and more than 9,000ha of grazing pasture. The company also owns 12 mills and two refineries in PNG and in Liverpool, in the UK. Another analyst opines that the acquisition will have minimal earnings impact on Sime Darby. He estimates an almost zero earnings accretion after taking into account the loss of interest income from the internal funds utilised for the acquisition and additional borrowing costs. “[Sime Darby’s] management has provided guidance of 4% to 5% accretion in two years, based on a CPO (crude palm oil) price assumption of US$800 per tonne or approximately RM2,600 per tonne. We believe upside would come from landbank expansion in Papua New Guinea or synergies extracted from the exercise,” says the analyst. Nevertheless, NBPOL’s Liverpool refinery will complement Sime Darby’s existing downstream business in Europe, said UOB KayHian in a research note last Friday. “The Liverpool refinery supplies about 95% of traceable sustainable palm oil to the UK market with good premium pricing. The UK is a totally new market for Sime Darby as it only has one refinery in the Netherlands,” it wrote. With the Liverpool refinery, Sime Darby’s total capacity in the region will increase to 750,000 tonnes per annum, said the research firm. The traceability of NBPOL’s palm oil products as sustainable is also good branding for Sime Darby to capture the European market, it added. — By Kamarul Azhar |
This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.
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