NEW Britain Palm Oil Ltd (NBPOL) came full circle when it returned to the Sime Darby fold earlier this year.

“As progression of time would have it, the event today essentially marks a homecoming or a reunion for the two companies that essentially share the same origin and history,” Datuk Henry Sackville Barlow, chairman of NBPOL, said in his address on March 2 in Port Moresby, Papua New Guinea, to mark the completion of the acquisition.

Sime Darby managed to secure 98.8% in NBPOL after the close of its general offer. On March 24, it said it will make a compulsory acquisition of the remaining shares in NBPOL, after which the company will automatically be removed from the Port Moresby Stock Exchange.

But the plan is to eventually relist NBPOL.

In an interview with The Edge, Sime Darby Bhd president and group chief executive Tan Sri Mohd Bakke Salleh says the next step will be to bring in a strategic investor to reduce its shareholding in NBPOL.

“We are going to sit down with the authorities in PNG to discuss how their institutions would like to be a part of us. At the same time, we are going to look for strategic investors outside Malaysia and outside PNG — they could come from the ranks of other plantation companies, institutions or sovereign funds — to reduce our shareholding (in NBPOL).”

In fact, Bakke says the move to bring in an international investor is being worked on almost immediately. “The PNG side will take some time but on the strategic investor, we have started already and at the right time, we will release the name.”

While no time frame has been set by the board, Bakke says finding a strategic investor is being worked on as a matter of urgency. “First of all, we have to sit down and discuss with the other side the benefits of them putting their money in NBPOL and so on.”

A bit of history to put things in perspective: NBPOL was established in 1966 by Harrisons & Crosfield,which is one of the three founding companies that eventually became the Sime Darby of today.

NBPOL started as a smallholder scheme, a joint venture between H&C and the PNG government. The first scheme was set up at Hoskins in PNG, which was considered a pilot initiative back then. Since then, NBPOL has morphed into the largest plantation player in PNG with a landbank of 135,000ha as well as 12 oil mills, two refineries, a special fractionation plant and a bakery fats plant in the UK.

In 1996, the PNG government divested its stake to Kulim (M) Bhd, whose stake Sime Darby eventually acquired as well as the rest of the NBPOL shares via a general offer. The acquisition was completed on March 2 this year, Sime Darby’s largest since its mega merger in 2007.

Most analysts view the acquisition positively, noting that NBPOL is one of the more efficient players in the industry. “We believe the earnings accretive deal will contribute about 4% to 5% to the group’s earnings,” opines Public Investment Bank in a report.

Moody’s concurs, noting that the acquisition would widen Sime Darby’s competitive advantage in the upstream plantation segment. “Sime Darby is the world’s largest upstream crude palm oil producer. The acquisition would increase its planted area by 15%. By comparison, the next largest are Felda Global Ventures and Golden Agri-Resources,” it says in a report.

NBPOL will add 135,000ha to Sime Darby’s landbank, bringing the total to almost one million hectares spread over five countries.

NBPOL, Moody’s adds, will enhance Sime Darby’s European sales channel, given that its 300,000 tons per annum (tpa) refinery in Liverpool is fully certified by the Roundtable of Sustainable Palm Oil (RSPO). This complements Sime Darby’s existing 450,000 tpa refinery in the Netherlands.

NBPOL’s yields are above industry average. It recorded a fresh fruit bunch yield of 21.7MT/ha in 2013, which was higher than that of Sime Darby (19.9MT/ha) and other large players.

Sime Darby will be forking out RM5.85 billion for NBPOL, or £7.15 per share. This is 1.28 times net tangible asset value (NTAV) and at an 80% premium to the market price at the time.

Including assumed debt of RM850 million in NBPOL’s balance sheet, the cost would total RM6.47 billion, notes Moody’s.

Is this on the expensive side? Views are mixed.

Some analysts feel that at 1.28 times NTAV, the price is justified given the scarcity of such landbank and the fact that PNG is a much better location for expansion compared with Africa.

Others view the valuation as expensive, more so when commodity prices are in a down cycle and plantation companies are feeling the impact on their bottom line.

NBPOL, in particular, saw a sharp fall in its earnings in FY2011, FY2012 and FY2013. In FY2010, it recorded a net profit of US$266.4 million but this plunged to just US$66.4 million in FY2011.

Earnings fell to a mere US$1.6 million in FY2012 before recovering to US$50.1 million in FY2013 and US$68.6 million in FY2014.

Bakke, however, is confident that NBPOL will get back on its growth path. “NBPOL’s performance has been strong and shown fairly consistent growth in the recent past. The temporary setback in earnings is in line with extreme weather conditions that affected the industry and the efforts to rehabilitate plantation assets following the acquisition of Cargill estates in PNG,” he says.

Bakke believes what is more important is that NBPOL should not be evaluated as a standalone company but as part of the bigger Sime Darby family. “Together, both NBPOL and Sime Darby are now on a much sounder platform for growth. I have no doubts about that.”

Based on a funding mix of 80% debt and 20% cash, Moody’s says this could result in Sime Darby’s gross leverage reaching 2.6 times to 2.9 times after the transaction. “Such a range would be too high for its current A3 rating,” it notes.

Indeed, a view is that raising gearing at this time may not be prudent, given current market conditions (falling CPO prices and slowing economic growth).

But Bakke believes that Sime Darby’s new gearing level is not one that creates an untenable situation that is risky for the group’s business.

He explains: “As at the end of this financial year, we expect our gross gearing ratio to be about 62% to 63%; this is all right by industry standards. It is not above 1.0, which will be cause for concern. Bear in mind that this gearing ratio is calculated on the basis that all our plantation assets are reflected at cost. We have not revalued our assets. So, if we do a revaluation, there will be an improvement in equity value.”

Furthermore, Sime Darby will pare down its borrowings. “The deal has happened and what is important now is to identify the means to bring down the gearing, and we will find a solution,” he says.

Initiatives have already been started to pare down the bonds, and Sime Darby is working hard to improve free cash flow in its business, he adds. “In terms of listing our motor business, it is a question of timing; it will give us the source to reduce our borrowings.”

For some years now, Sime Darby has been looking to expand its plantation landbank. Today, apart from PNG, its plantations span Indonesia, Malaysia and Liberia.

According to Bakke, increasing its plantation hectarage in PNG is part of Sime Darby’s plan further down the road, the expansion made easier with the acquisition of NBPOL. — By Anna Taing

This article first appeared in The Edge Malaysia Weekly, on March 30 - April 5, 2015.

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