23/07/2008 (The Edge Daily) - SHARES of Asiatic Development Bhd (RM6) took a tumble in recent days on the back of a fall in crude palm oil (CPO) prices. The benchmark CPO futures contracts fell below RM3,300 per tonne.

Prices for edible oils were under pressure after crude oil prices dropped sharply on the back of worries of slowing demand. Nevertheless, with consumption demand still on the rise, tight inventory levels and probability of more weather-related supply disruptions, the market for food commodities should stay relatively robust by historical standards, if off record high levels.

Similarly, Asiatic is expected to report good earnings in the next few years. Net profit is estimated to expand by some 36% year-on-year (y-o-y) to RM470 million in 2008. Going forward, lower average CPO prices assumption of RM2,800 per tonne translates into lower earnings of RM375 million and RM384 million, respectively for 2009-2010. But these are still well ahead of the company’s earnings in previous years. Its shares are trading at pretty decent valuations of 9.7 and 12.1 times our estimated 2008-2009 earnings, respectively.

Stronger balance sheet - leverage for expansion
The relatively robust earnings will further strengthen Asiatic’s balance sheet. The company’s cash pile increased from RM261.4 million at end-2006 to RM495.1 million at end-2007 and RM524.3 million at end-1Q08. This is expected to increase further in the foreseeable future.

Its burgeoning coffers will support the company’s ambitious expansion plans for sustained longer-term growth. Asiatic plans to increase its current 65,500ha of plantation landbank in Malaysia by acquiring up to 143,000ha of land in Kalimantan, Indonesia under two joint-venture projects.

Some 98,300ha of land are to be acquired under the first 70:30 venture with Indonesian-based Sepanjang group. So far, the company has completed the acquisition of the first of five contiguous parcels with an area of 14,261ha, of which about 3,000ha have been planted as at end-May. The remaining area should be planted by 2009.

Most recently, Asiatic formed the second venture to acquire some 45,000ha of land, of which about 12,500ha have been granted location permit to clear and plant oil palm. It is in the process of securing permits for two other parcels of land totalling some 32,500ha.

The company is on the lookout to acquire more landbank and targets to plant up 6,000-10,000ha annually in total.

Progress on genome-based research
In addition to landbank expansion, Asiatic is undertaking research to develop more high-yielding and disease-resistant oil palm feedstocks through Asiatic Centre for Genome Technology (ACGT).

The company, a joint venture with US-based Synthetic Genomics Inc, recently completed the first draft assembly and annotation of the oil palm genome. Work is ahead of schedule and will continue on additional sequence and analysis of the genome.

The identification of molecular markers and genes that control factors such as yield, height and oil quality will enhance future oil palm breeding programmes. ACGT expects its research to culminate in the commercial screening of feedstocks by 2012-2013.

ACGT is also undertaking an in-depth genomic, physiological and biochemical analysis of Jatropha. The plant produces oil-rich seeds and is very hardy - it thrives on almost all kinds of soil, including those unsuited for field crops such as wasteland. Jatropha oil can be processed into high quality biodiesel and has higher oil yield than soybean, corn and rapeseed.

However, since none of the Jatropha species have been properly domesticated and studied, yields are often unpredictable to foster large-scale commercial production. The company’s experimental planting covers a variety of Jatropha from all over the world. There is no target date for commercial application as yet but this may well change with further research.

To date, Asiatic has invested about RM130 million in the venture, including a 4.5% stake in Synthetic Genomics. The company plans to invest RM50 million annually to see its projects to fruition. Although there are no returns in the short term, the longer-term gains for producing high-yielding oil crops could be vast, especially against the backdrop of growing demand for food and energy even as land becomes increasingly scarce.