Introduction
Boustead Plantation (BPlant) is a mid-sized plantation company listed in Bursa Malaysia with market capitalization of RM2.51 billion (share base of 2,240 million x share price of RM1.12 as of 25 April 2022). Major shareholders are Boustead Holdings with 57.4% and LTAT with 12.1% giving free floats of about 30%.
I believe BPlant is grossly undervalued and may be worth a minimum of RM2.29 to bluesky cases of RM3.92 to RM6.49 per share, or 104% to 350% - 580% higher than current share price of RM1.12. A hypothetical case that makes complete business sense will see KLK group or IOI Corp acquiring 100% Bplant for RM2.18 – RM2.68 per share.
Plantation Landbank
To understand why Bplant is grossly undervalued, we first look at how much plantation landbank it owns:
|
Estate |
Owner ship |
Status |
Size (ha) |
NBV (RM m) |
BV RM psf |
Market Value# RM psf |
Market Value RM m |
Value per share RM |
|
Balau |
100% |
FH |
247 |
280.0 |
10.53 |
12.00 |
319.4 |
0.14 |
|
Bukit Mertajam |
100% |
FH |
2,165 |
142.1 |
0.61 |
4.00 |
931.7 |
0.42 |
|
Kuala Muda |
50% |
FH |
760 * |
26.8 |
0.33 |
1.50 |
122.6 |
0.05 |
|
Malakoff |
100% |
FH |
562 |
63.9 |
1.06 |
8.00 |
484.0 |
0.22 |
|
Telok Sengat |
100% |
FH |
3,690 |
262.1 |
0.66 |
1.50 |
595.5 |
0.27 |
|
Batu Pekaka |
100% |
FH |
969 |
45.8 |
0.44 |
1.50 |
156.3 |
0.07 |
|
Taiping RUbber |
100% |
FH |
1,348 |
72.9 |
0.50 |
1.50 |
217.5 |
0.10 |
|
Sub-Total |
|
|
9,741 |
893.6 |
|
2.72^ |
2,827.1 |
1.26 |
|
Remaining Planted |
100% |
FH |
65,520 |
|
|
0.32 |
2,293.2 |
1.02 |
|
Total |
|
|
75,261 |
|
|
|
5,120.3 |
2.29 |
|
Kulai Young** |
100% |
FH |
671 |
65.1 |
0.90 |
6.00 |
432.9 |
0.19 |
*effective stake ^average value psf **disposed to YTL Power on 27 Jan 2022 #source from Maybank research
One key thing to note is that all 100% of Bplant estates are located in Malaysia and none in Indonesia. This is important as palm oil export from Indonesia is now subject to heavy export duties and certain export restriction, hence BPlant is able to enjoy the full benefit of high international CPO prices as it exports all from Malaysia.
Out of the total planted oil palm area of 73,494 ha, the age profile as of at 31 Dec 2020 was as follows:
9% Immature (0 to 3 years)
17% Young mature (4 – 9 years)
29% Prime mature (10 – 20 years)
45% Past prime (> 20 years)
BPlant produces about 250,000 MT of FFB per quarter or about 1.0 million MT per year.
High Palm Oil Prices to stay
Internation CPO prices have been spiking up from around RM4,500 per tonne in September 2021 to about RM5,000 per MT in Dec 2021 and peaked at RM8,700 per MT in February 2022 before stabilizing around RM6,500-6,800 per MT in March-April 2022.
The key driver for the surging CPO prices was due to the special military operation by Russia in Ukraine. Russia was reported building up troops in Ukraine border in January 2022 and invaded Ukraine on 24 February 2022. The war conflict in Ukraine has been going on for almost 2 months with no visible end in sight yet.
Russia and Ukraine are top producers of sunflower oil and export over 50% of the world sunflower oil or about 9 million tonnes per year. With the US and western countries imposing strict economic sanctions on Russia, Russia has also imposed restriction on sunflower oil export to the west until 31 August 2022. Export of sunflower oil from Ukraine is restricted due to war. Its spring seeding season of sunflower will likely be missed this year due to war, which will limit export of sunflower oil to minimum for the rest of the year to 1H next year. This has seriously reduced the supply of edible oil to the world with supermarkets in many nations running out of cooking oil.
On the other hand, Argentina, the world’s top supplier of processed soy ahead of Brazil and the United States, briefly halted new overseas sales of soybean oil in mid March 2022 before hiking the export tax rate in a bid to tamp down domestic food inflation. The US Agricultural Department had forecast that US farmers would plant 4.3% more soybean (switching from corn) this year which may add a supply of about 3.0 million tonnes of soybean oil in 2022. This will likely be not sufficient to fill the gap of shortfall of 9.0 million MT of sunflower oil from Russia-Ukraine.
Indonesia being the largest palm oil exported in the world with annual export of 40-45 million tonnes of palm oil also briefly banned export of palm oil in March before hiking the export levies and duties on palm oil to a maximum of USD575 per tonne. The export levy will be raised by USD20/t for every USD50/t increase in CPO until it hits a maximum of USD375/t when CPO hits USD1,500/tonne. Coupled with the prevailing export duty of USD200/t, total export levies and duty will hit a maximum of USD575/t when international CPO hits USD1,500/tonne. Indonesia government has also imposed a ceiling price of about USD1,000/t on domestic cooking oil, limiting the selling price of CPO of Indonesia producers. For example, if CPO price is USD1,000/t, Indonesia palm oil producer needs to pay export levy and duty of USD229/t if they export palm oil, netting them proceeds of just USD771/tonne, hence it encourages them to sell palm oil to domestic users at prices up to USD1,000/tonne of ceiling price. Only when international CPO price hits above USD1,575/tonne, Indonesia palm oil exporters may get a net proceed of USD1,000/tonne or above. For example, if CPO price hits RM7,000/t then Indonesia palm oil exporter will get net proceeds of USD1,660/t – USD575/t = USD1,085/tonne. This means that Indonesia palm oil producers will only export when international CPO price hits above USD1,575/tonne or RM6,600/tonne.
As I write this article, Indonesian government just announced to ban palm oil export :
https://klse.i3investor.com/web/blog/detail/kianweiaritcles/2022-04-22-story-h1621579677-Indonesia_to_ban_palm_oil_exports_to_tackle_domestic_shortage
Since Indonesia imposed the heavy export levies and duty on palm oil, international CPO prices have been moving up past RM6,600/tonne. As of 23 April 2022, CPO futures are as follow:
Future Month CPO Futures (RM/tonne)
April 2022 6,607 (spot on 21 April)
May 2022 6,869
June 2022 6,615
July 2022 6,349
Aug 2022 6,160
Sep 2022 6,045
Oct 2022 5,965
Nov 2022 5,926
Dec 2022 5,908
Jan 2023 5,901
Feb 2023 5,866
Mar 2023 5,852
Apr 2023 5,821
May 2023 5,690
The CPO prices are in a backwardation market where front month prices are higher than later months. May and June 2022 futures clearly show that buyers need to pay above RM6,600 in order to get export from Indonesia. CPO futures remain firmly above RM6,000/t until August 2022, indicating tight supply until end of August coinciding with restriction on sunflower oil export from Russia until 31 August. Thereafter, the backwardation is less steep with April 2023 future just RM224/t lower than Sept 2022 future. This reflects market’s view of tight supply after the peak season of palm oil in July-Sept 2022.
CPO price averaged about RM6,000/t in Jan-Mar 2022. The average of CPO futures for April 2022 to Dec 2022 is RM6,271/t, meaning that the average CPO for 2022 will likely be above RM6,200/tonne. However, local analysts mostly forecast an average CPO price of just RM4,100-4,300/t for 2022. For that to happen, CPO prices would need to collapse from RM6,600/t in April to RM3,225/t for the rest of eight months from May 2022. To me, this is a ridiculous assumption.
If I take a conservative approach to assume that CPO prices will average RM5,000/t for May-Dec 2022, then the average CPO for 2022 will be RM6,000x3 (Jan-Mar) + 6,500 (Apr) + 5,000 x 8 (May-Dec) = RM5,375/tonne.
BPlant to make huge profits in 2022
For Dec 2021 quarter, BPlant registered revenue of RM341.5 million, pretax profit of RM137 million and net profit of RM85.1 million or EPS of 3.8 sen. This was achieved based on FFB output of 248k MT and average selling price of RM5,044/tonne. The tax rate was extraordinarily high at 36.7% for this quarter due to higher state taxes and windfall profit levies. Interestingly, Bplant registered higher pretax profit of RM124.3 million and net profit of RM95.6 million for Sept 2021 quarter though average selling price was lower at RM4,331/t but at higher FFB output of 263k MT and lower tax rate of 23.4%.
For the coming Mar 2022 quarter, I assume flat FFB output of 250k MT and a normal tax rate of say 30%. Bplant does not sell forward and sell almost entirely on spot, hence it is safe to assume that it can achieve an average selling price of RM6,000/t for Mar 2022 quarter. Assuming FFB oil extraction rate of 20%, Bplant should be making extra profit of RM1,000/t x 250,000t x 20% = RM50 million more than its Dec 2021 quarter based on higher selling price. Pretax profit may be about RM137+50 = 187m and net profit may top RM187m x 70% = RM131 million or EPS of 5.8 sen.
For subsequent quarters in 2022, we can project as below:
|
Average CPO/qtr |
CPO RM5,000/t |
CPO RM6,000/t |
CPO RM7,000/t |
|
FFB output/qtr |
250,000 tonnes |
250,000 tonnes |
250,000 tonnes |
|
Pretax Profit (RM m) |
137 |
187 |
237 |
|
Net Profit /qtr (RM m) |
96 |
131 |
166 |
|
EPS (sen) / qtr |
4.3 |
5.8 |
7.4 |
|
Net Profit 2022 (RM m) |
418 |
523 |
628 |
|
EPS 2022 (sen) |
18.7 |
23.3 |
28.0 |
Cash flows will be stronger if we add back non-cash depreciation and amortization charges of about MR130 million a year. Capex will be minimum assuming not much re-planting for these 2 years, hence free cash flows may be strong at RM548 million, RM653 million and RM758 million for 2022 if CPO prices average at RM5000/t, RM6000/t or RM7000/t for May-Dec 2022. That means Bplant may see free cash flows of 24.5 sen to 33.8 sen per share in 2022.
For 2023 and beyond, annual net profit may be around RM244m (CPO RM4,000/t) to RM384m (for CPO RM5,000/t) to RM524m (CPO RM6,000/t) to RM664m (CPO RM7,000/t) or EPS of 11 sen to 30 sen. Annual cash flows may be around RM374m (CPO RM4,000/t) to RM514m (CPO RM5,000/t) to RM654m (CPO RM6,000/t) to RM794m (CPO RM7,000/t) or 16 sen to 23 sen to 29 sen to 35 sen per share.
Bplant had net debt of RM931.7 million as of 31 Dec 2021 and this will drop to RM503 million when sale proceeds of RM429 million is received from the Kulai land disposal. Hence, Bplant will be able to declare high dividends from 2022 onwards.
Maybank projected net profit of RM203m for Bplant in FY2022 on average CPO price of RM4,100/tonne. This will likely underestimate BPlant earnings as its net profit may be double at RM418m if CPO prices average RM5,000 for the rest of the year. Assuming that Bplant declares a dividend payout ratio of 100%, dividend may top 18 sen for FY2022 yielding 16.1% based on current share price of RM1.12. Assuming a dividend payout ratio of 60% FCF thereafter, dividends may be 9.6 sen (CPO RM4,000/t) to 13.8 sen (CPO RM5,000/t) to 17.4 sen (CPO RM6,000/t).
Huge Upside Value in Bplant Landbank
As summarized in above table, Bplant owns large plots of plantation landbank near township (total 9,741 ha) that has development potential for industrial or residential use. The recent sale of its Kulai Young estate of 671 ha at price of RM6.00 psf or RM640,000 per ha clearly shows the potential especially for the estates in Bukit Mertajam, Malakoff and Taiping.
Based on current estimates of market value per table above, the market value of this 9,741 ha of Bplant land will fetch a total value of RM2,827 million or RM1.26 per share based on weighted average price of RM2.72 psf or RM292,800 per ha. The value of this 9,741 ha land ripe for disposal may vary depending on the assumed market value:
|
Market value |
BV of RM0.85 psf |
RM2.72 psf or RM293k/ha |
RM4.00 psf or RM430k/ha |
RM5.00 psf or RM538k/ha |
RM6.00 psf or RM646k/ha |
|
Value (RM m) |
894 |
2,827 |
4,157 |
5,197 |
6,236 |
|
per share (RM) |
0.40 |
1.26 |
1.86 |
2.32 |
2.78 |
For the remaining planted area of 65,520 ha, the value may vary depending on market value for plantation land of RM35,000/ha to RM70,000/ha and bluesky cases of RM132,000/ha to RM224,000/ha:
|
Market value |
RM35k/ha |
RM50k/ha |
RM70k/ha |
RM132k/ha |
RM224k/ha |
|
Value (RM m) |
2,293 |
3,276 |
4,586 |
8,648 |
14,675 |
|
per share (RM) |
1.02 |
1.46 |
2.05 |
3.86 |
6.55 |
In comparison, other plantation stocks in Bursa are valued at:
|
|
Land size (ha) |
Market cap (RM million) |
Market cap/land (RM / ha) |
|
KLK |
300,000 |
30,270 |
100,900 |
|
IOI |
315,000 |
27,840 |
88,380 |
|
Sime Plantation |
718,174 |
36,310 |
50,559 |
|
SOP |
81,885 |
3,690 |
45,063 |
|
BPlant |
75,261 |
2,530 |
33,616 |
In May 2021, SOP acquired remaining 40% in SOP Sabaju with 3,591 ha of planted area for an enterprise value of RM160 million or valued it at RM44,600/ha. In June 2021, KLK offered a price of RM3.10 per share to acquire all of IJM Plantations, valuing it at an enterprise value (EV) of RM3,236 million or equity value of RM2,730 million for its 61,277 ha of planted palm oil land (41% in Malaysia and 59% in Indonesia), valuing it at EV/ha of RM52,805/ha (~RM70,000/ha for its Sabah estates and RM40,000/ha for Indonesia land). Earlier in Aug 2017, BPlant itself bought a piece of 9,998 ha plantation land from Dutaland at RM75,012/ha. Hap Seng Plantations acquired a piece of leasehold plantation land of 19,623ha in Sabah for RM99,737/ha.
The above comparison clearly shows that Bplant is undervalued at just RM33k/ha. Should it be revalued to its closest peer SOP’s value of RM45k/ha, BPlant should be worth RM3,388 million market capitalization of RM1.51 per share. If it is valued to the top end KLK benchmark of RM100k/ha, then BPlant would be worth RM7,594 million market capitalization or RM3.39 per share.
A Quantum Leap in Plantation Land Value
Plantation land in Malaysia is undergoing a quantum leap in value as CPO prices shoot past RM6,000 per tonne and sizable plantation land is becoming scarce. Freehold plantation land in Malaysia has become even more valuable after the various issues faced by Indonesia palm oil producers now in Indonesia (very heavy export levy and duty, restricted export quantity, etc.).
Plantation land in Malaysia has been transacted in the past few years at a range of RM70,000/ha (eg. KLK-IJM Plantation deal in 2021) to RM100,000/ha (Hap Seng Plantation acquisition in Sabah in 2018). Average CPO prices then was about RM3,000 to 3,500 / tonne. A typical efficient plantation company then could make an EBIT margin of RM1,000-1,300/tonne of CPO production (eg. KLK made an EBIT of RM551.5m on 507k tonnes of CPO+PK or RM1,088/tonne in H1FY2021). IJM Plantation made an EBIT of RM86.2 million in Jun 2021 at average CPO price of RM3,366/t or EBIT margin of RM1,317/tonne.
Bplant EBIT margin and its implied cost of production is tabulated below:
|
CPO price |
EBIT (RM m) |
FFB output (ton) |
EBIT/CPO (RM/t) |
Implied Cost (RM/t) |
|
2,793 (1Q2020) |
17.3 |
209,857 |
412 |
2,381 |
|
2,811 (2020) |
139.4 |
1,001,557 |
696 |
2,115 |
|
3,324 (4Q2020) |
62.5 |
247,693 |
1,262 |
2,062 |
|
3,751 (1Q2021) |
33.4 |
180,165 |
927 |
2,824 |
|
4,014 (2Q2021) |
75.6 |
231,702 |
1,305 |
2,709 |
|
4,331 (3Q2021) |
133.1 |
263,276 |
2,528 |
1,803 |
|
5,044 (4Q2021) |
148.5 |
248,328 |
2,990 |
2,054 |
|
4,341 (2021) |
390.6 |
923,471 |
2,115 |
2,226 |
The table above shows that BPlant made a lower EBIT margin of RM412/t to RM696/t when CPO prices were below RM3,000/t, lower than that of KLK or IJM Plantation. BPlant implied cost of production was about RM2,100-2,300/t in 2020-2021 which was higher than that of KLK or IJM Plantation which was about RM1,500-2,000/t then.
Now the fertilizer costs have jumped up a lot since the Ukraine war started as Russia and Ukraine are the major exporter of fertilizer. This may easily add 15% to the cost of production or about RM300/t. Hence, Bplant cost of production may rise to RM2,500/t in 2022.
When CPO prices were around RM3,000/t, plantation companies made an EBIT of RM1,200/t. With average annual crop production of 20t/ha of FFB, one hectare of plantation land could produce 20 tonnes of FFB and 4.0-4.8 tonnes of CPO, hence creating EBIT of RM4,800-5,760 or RM5,280 average. Plantation land was transacted at RM50,000/ha to RM70,000/ha giving EBIT returns of 10.6% to 7.5%.
Now with CPO prices hovering above RM6,000/t, plantation company may enjoy EBIT margin of RM3,500/t or above, eg. Bplant made an EBIT margin of RM2,990/t at CPO price of RM5,044/t. Now with higher cost of production of RM2,500/t, EBIT margin will be lower but still be good at RM3,500/t for CPO price of RM6,000/t and RM4,000/t for CPO price of RM6,500/t. Hence, a hectare of plantation land now can earn EBIT of RM14,000 to RM16,800 at CPO price of RM6,000/t. Using the similar benchmark of EBIT returns of 10.6% to 7.5% above for land transaction, plantation land now should be valued much higher at RM14,000-16,800 / (10.6% to 7.5%) or RM132,000 to RM224,000/ha.
Valuation of BPlant
(i) Cashflow Valuation
KLK is trading at a valuation of 19x forward PER and 3.5% dividend yield. KLK acquired IJM Plantation at a PER of 19x too. IOI Corp is trading at 2022 PER of 18x and dividend yield of 3.3%. Sime Darby Plantation is trading at 2022 PER of 19x and dividend yield of 3.9%.
JP Morgan in its report in Feb 2022 projected that CPO prices would stay high for the next 2 years. It valued Sime Darby Plantation at RM5.90 and KLK near RM30.00. Foreign analysts have more data access to other edible oil supply-demand dynamics and hence may make a better judgement call on plantation stocks than most local analysts. For example, soybean prices hit record high as per news below and foreign analysts are likely to have better data beforehand to make a better projection.
https://www.theedgemarkets.com/article/soyoil-surges-record-high-indonesia-bans-palm-oil-exports
Due to the smaller size of Bplant compared to KLK or Sime Plantation, I would value Bplant at a PER of 15x or dividend yield of 6% or FCF yield of 10%. Cashflow valuation of BPlant is summarized in table below for various CPO price assumptions:
|
CPO Price |
RM4,000/t |
RM5,000/t |
RM6,000/t |
RM7,000/t |
|
Net Profit (RMm) |
244 |
384 |
524 |
664 |
|
EPS (sen) |
10.9 |
17.1 |
23.3 |
29.6 |
|
Annual cashflows |
374 |
514 |
654 |
794 |
|
Cashflow/share (sen) |
16.7 |
22.9 |
29.2 |
35.4 |
|
Value at 15x PER (RM) |
1.62 |
2.56 |
3.50 |
4.44 |
|
Value at 10% FCF yield (RM mn) |
3,730 |
5,140 |
6,540 |
7,940 |
|
Value at 10% FCF yield (RM) |
1.67 |
2.29 |
2.92 |
3.54 |
(ii) Landbank Valuation
I will split the landbank of Bplant into two for valuation purpose:
1) the 9,741 ha near township and ripe for disposal for industrial or residential development
2) the balance 65,520 ha of planted estates that are kept for palm oil production
For the first category, I would assume that the land will be worth at least RM4.00 psf to RM6.00 psf that was the price Bplant sold its Kulai estates for. For land with property development potential, a land price of RM4.00 psf is simply too cheap even for secondary townships like Taiping or Bukit Mertajam. For conservative case, I will just take it as RM4.00 psf. For a bluesky case, I will assume RM6.00 psf.
For the second category, I will assume a price tag of RM70,000/ha for the conservative case as recent large transactions showed a minimum of RM70,000/ha (such as the KLK-IJM Plantation deal, BPlant-Dutaland deal, Hap Seng Plantation deal in Sabah). For a bluesky case, I will assume a price tag of RM130,000/ha as I believe plantation land price is going through a quantum leap and good large plantation land is getting harder to come by.
The table below summarise the valuation of BPlant landbank:
|
|
Conservative Case |
Bluesky Case |
|
(1) 9,741 ha |
RM4,194 million |
RM6,290 million |
|
(2) 65,520 ha |
RM4,586 million |
RM8,518 million |
|
TOTAL |
RM8,780 million |
RM14,808 million |
|
Total per share |
RM3.92 |
RM6.49 |
The re-rating factors for BPlant share price will be continued high CPO prices above RM6,500/tonne until year end and disposal of some land parcels at close to RM100,000/ha or above.
A Hypothetical Take-Over Case
Bplant at current share price is a prime take over target, on bullish palm oil outlook for next 2-3 years and with its parent company, Boustead Holdings Bhd heavily indebted with net debt of RM6.6 billion. Disposal of its 57% stakes in BPlant at say RM2.18 per share would rake in cash of RM2.8 billion, a very handy sum to pare down its borrowings to a more manageable level. LTAT would get cash proceeds of RM591 million for its 12.1% stake.
For a potential acquirer, if it offered say RM65,000/ha for 100% BPlant or RM4.89 billion or RM2.18 per share, it may recoup all its investments within 5 years if CPO prices stay at average RM5,000/tonne and it managed to dispose off the Bukit Mertajam and Taiping estates at say RM6.00 psf:
Initial Investment Year 1 Year 2 Year 3 Year 4 Year 5 Total
(5,270m) 548 514 514 514 514 2,604
Disposal proceed 870 1,398 2,268
4,872
The acquirer would be able to recoup all investment within 4 years should CPO prices stay at current level of RM6,500/t for next 4 years.
A potential suitor may be KLK group who acquired IJM Plantation for RM70,000/ha for its Sabah estates. BPlant would fit nicely into KLK’s estates that have over 56% located in Indonesia. As BPlant estates are all in Malaysia, these would help to flip KLK estate mix to 45% Indonesia : 55% Malaysia.
Furthermore, KLK share is trading at a premium valuation at RM100,900, 3 times higher than BPlant valuation of RM33,616/ha. A combination of cash and share offer would be highly earnings accretive for KLK.
A further upside to KLK in the longer term may be for KLK to improve the FFB yield of BPlant estates from currently below 20t/ha to about 24t/ha of KLK group’s average yield.
Another potential suitor may be IOI Corp who is trading at RM88,380/ha
and also has more plantation estates in Indonesia than in Malaysia. Any
offer below RM80,000/ha or RM2.68 per share for Bplant would be earnings accretive for IOI Corp or even Sime Darby Plantation.
https://klse.i3investor.com/web/blog/detail/dragon328/2022-04-26-story-h1622262012-BPlant_has_Tremendous_Upsides_as_a_Prime_Take_over_Target
