22/2/07  (Bloomberg) -- IOI Corp., the world's largest oil- palm grower, plans takeovers in Southeast Asia to extend the company's plantations by a third as demand for the crop rises.

The Malaysian company's 2.2 billion ringgit ($629 million) of cash is a ``war chest'' for acquisitions, said Executive Director Lee Yeow Chor, 40, without naming potential targets.

IOI, based in Putrajaya, new rival Synergy Drive Sdn. and other growers are snapping up assets to take advantage of prices that have surged, driven by the commodity's increasing use in foods and soaps, and as an alternative fuel. Drought may also curb supply this year, further spurring prices, Lee said.

``It makes sense, although they're probably buying near the peak of the cycle,'' said Paul Teoh, who helps manage $272 million of Asian assets at Meridian Asset Management Sdn. in Kuala Lumpur. ``Valuations are quite rich at current levels.''

Palm-oil futures on the Malaysia Derivatives Exchange, which have gained 33 percent over the past year, may climb to 2,200 ringgit a ton in 2007, Lee said. The contract today added as much as 19 ringgit, or 1 percent, to 1,944 ringgit and traded at 1,942 ringgit at 5:36 p.m. in Kuala Lumpur.

Synergy Drive, a newly formed Malaysian entity backed by the government, in January agreed to buy oil-palm growers including Sime Darby Bhd., and will become the world's biggest producer, displacing IOI. PT Astra Agro Lestari, Indonesia's largest grower, said Jan. 26 it will add 100,000 hectares.

`Bigger Player'

``We want to be a bigger player, starting with plantations,'' Lee said in an interview on Feb. 16. ``We have a few targets in mind. We prefer to acquire established oil-palm plantations instead of vacant plantation land.'' IOI will buy the assets over the next three years, he said.

Shares in IOI, which have gained 48 percent over the past year, today rose 0.5 percent to 20 ringgit, valuing the company at 25 billion ringgit. The Kuala Lumpur Stock Exchange Composite index lost 0.1 percent.

IOI wants to buy as many as 50,000 hectares, or an additional 31 percent, expanding into neighboring Indonesia for the first time, said Lee. Malaysia and Indonesia together account for 85 percent of global palm-oil output.

Lee declined to comment when asked if IOI plans to buy PT Perusahaan Perkebunan London Sumatra Indonesia, the country's second-largest publicly traded agricultural company. London Sumatra stock today rose 3.4 percent in Jakarta.

IOI's so-called gearing, the ratio of its debt to equity, may be raised to 30 percent from 14 percent if borrowings were needed to help fund takeovers, Lee said.

Profit Growth

Lee said IOI isn't concerned about Synergy Drive, which also agreed to acquire Kumpulan Guthrie Bhd. and Golden Hope Plantations Bhd., because a company's size alone doesn't dictate the price of palm oil.

``There is no price premium for being big or small,'' Lee said. ``It's a commoditized market.''

Higher palm-oil prices helped IOI's fiscal second-quarter profit to increase 67 percent to 382.6 million ringgit, IOI said Feb. 13. The company expects similar increases for the rest of the year, Lee said.

``The present palm-oil price has not factored in the possible El Nino phenomenon,'' Lee said, referring to the global weather pattern that can parch parts of Asia. ``This will definitely be a boost to palm-oil prices,'' he said.

El Nino

El Nino, which some forecasters say is already under way, can strike every four to seven years. The events are caused by the warming of equatorial waters in the Pacific. Still, meteorologists in Australia said yesterday the El Nino is ending.

``If anything's going to happen, it should be this year,'' said Rachman Koeswanto, an analyst at Deutsche Bank AG in Jakarta. ``El Nino is one thing, but we're also waiting for other catalysts, such as capacity for biodiesel in Southeast Asia, to take off.''

Malaysia's total crude palm-oil production fell 26 percent in December, and 2.5 percent in January, according to the Malaysian Palm Oil Board. The government has forecast output this year of 16.2 million tons.

IOI, which sold palm oil for an average of 1,560 ringgit a ton in the six months to December, expects it to fetch more than 1,800 ringgit in the second half of the fiscal year, Lee said.

Still, even without an El Nino to spur prices, demand for palm oil will rise, said Lee. The U.S. and Europe will buy more, and consumption in China, the world's biggest user, will increase at least 10 percent, he said.

``There will always be a market for palm oil-based biodiesel,'' Lee said, referring to the blend of regular diesel with the tropical crop. Rapeseed and soybean crops alone can't service demand from Europe, he said.

The European Union wants biofuels to make up 5.75 percent of transport fuel by 2010 and 10 percent by 2020.

IOI is in talks with European oil companies to establish a $300 million biodiesel plant that would probably be located in Rotterdam, the Netherlands, Lee said. IOI, which already has a palm-oil refiner in the city, might take a 50 percent stake.