The Star Online (02/01/2021) - IN the last several years, the Malaysian plantation industry has been buzzing with robust merger and acquisition (M&A) deals against the backdrop of weak crude palm oil (CPO) prices.

With land scarcity also playing a role, the momentum for M&A activities in the plantation sector picked up in 2020 after slowing down slightly a year earlier.

Companies with excess estates sought to dispose of the assets as they had to deal with depressed earnings and unproductive land usage.

On the contrary, companies with excess cash have been buying over these lands at attractive valuations, considering that soft CPO prices have limited the sellers’ ability to bargain for higher land sale prices.

However, times have now changed as CPO prices have been touching new multi-year highs in recent months, hence putting the yet-to-be-completed deals under the microscope.

Would these deals fall through, given that there might be less incentive for the plantation owners to sell their estates at a low valuation similar to two years ago?

An analyst who spoke with StarBizWeek says that some of these deals are not likely to happen, with the strong CPO prices being the main factor.

“As a seller, you would be seeking higher prices for your assets, now that you can earn more from the estates thanks to the stronger CPO prices.

“But, on the other hand, the question is whether the buyers would be able to digest the new increased land prices? The finalisation of the M&A deals depends on the valuation and how long the high CPO prices can sustain, ” he says.

However, the analyst adds that some of the deals would continue, albeit at a tweaked selling price, if the relevant plantation companies intend to reduce their exposure in the plantation business.

“In the case of TH Plantations Bhd, the deals may not be taking place. An example would be the sale of its two plantation companies to Tamaco Plantation Sdn Bhd, considering that the Economic Planning Unit (EPU) has withdrawn its approval, ” he said further.

For context, TH Plantations said on Dec 10,2020 that it was informed by Tamaco that the EPU had withdrawn its consent for the sale, one year after the sales and purchase agreement (SPA) was signed.

It also said the conditions imposed in the EPU approval were being annulled.

In December 2019, TH Plantations had signed the SPA with Tamaco to dispose of its 100% stakes in Bumi Suria Ventures Sdn Bhd and Maju Warisanmas Sdn Bhd for RM170mil.

Both companies cumulatively own 6,513 hectares (ha) of oil palm plantation in Bintulu and Sibu.

It had then said the disposal was part of its rationalisation plan to revive its financial performance by divesting its assets to reduce borrowing and improve operational efficiency.

It is noteworthy that under the previous Pakatan Harapan administration, decisions were made to divest 14 TH Plantations subsidiaries, which own a combined 76,957 ha or 76.2% of the group’s land totalling 100,976 ha as at end-2019.

Maybank IB Research analyst Ong Chee Ting has said earlier that apart from CPO prices, other push factors for M&A activities would be rising cost pressures, labour shortage and scarcity of land.

He pointed out that land for all types of development in Peninsular Malaysia is extremely scarce and has become increasingly valuable.

“Scarcity of land, potential for property development conversion (especially on the west coast of Peninsular Malaysia with the highest population density), national or state strategic projects and potentially better return from other crops (on a per hectare basis) like durian are traditional demand alternatives for oil palm estate land in Malaysia.

“As the industry experienced its lowest profitability per hectare in 2019, we anticipate entrepreneurs to seize the opportunity to bargain hunt and scout for opportunities previously not available during the commodity bull market, ” says Ong.

Stronger M&A activities in 1H20

In recent years, notable companies that have announced M&A deals include Sime Darby Plantation Bhd, TH Plantations, Kuala Lumpur Kepong Bhd, TDM Bhd, KUB Malaysia Bhd, United Plantations Bhd, Boustead Plantations Bhd and Rimbunan Sawit Bhd.

In the first six months of 2020, Maybank IB Research reported that plantation-related transactions or the purchase of plantation companies instead of direct land deals have totalled about RM1bil.

This has surpassed total transactions done in 2019 worth RM528mil.

Weak CPO prices, alongside land scarcity, have driven the interest for M&A deals in the domestic plantation sector.

It is noteworthy that oil palm growers have suffered from a prolonged low CPO price environment since 2018, albeit having a slight reprieve in the last few months of 2019.

While CPO prices in Malaysia again went on a downtrend since the beginning of 2020, it picked up momentum from May onwards.

As of Dec 29,2020, daily CPO price in Malaysia hit RM3,788 per tonne – the highest level in nearly a decade – based on the Malaysian Palm Oil Board (MPOB) data.

MPOB expects the current high CPO prices trading above RM3,000 per tonne mark will continue until the first quarter of 2021, given the tight supply situation.

Its latest statistics showed that palm oil stocks in November slumped to 1.56 million tonnes, which is the lowest since June 2017.

CPO production for the same period under review also dropped to 1.49 million tonnes, the lowest since March.

Moving into 2021, analysts are generally neutral on the plantation sector outlook.

According to AmBank Investment Research, it is neutral on the palm oil sector as it believes that there is a balance between the positive and negative factors.

“Also, we think that at a CPO price of more than RM3,500 per tonne, there are more downside risks instead of upside.

“We reckon that industry palm production would rebound in 2021 after sliding in 2020.

“We have assumed an average CPO price of RM2,500 per tonne for Malaysia in 2021, which is slightly lower than 2020’s average MPOB spot price of RM2,600-2,700 per tonne, ” it says.

MIDF Research, on the other hand, expects a slightly higher average CPO price for 2021 at RM2,700 per tonne.

The research house expects China’s replenishing activities to continue in the coming months ahead of the major Chinese New Year festival in the first quarter of 2021.

“As such, we foresee that inventory level to possibly remain tight in the coming months as the industry experiences a weaker production growth.

“This will possibly lend support to the CPO price, ” it says.

Read more at https://www.thestar.com.my/business/business-news/2021/01/02/will-higher-palm-oil-prices-depress-ma-deals