IJM-KLK deal will not lead to rerating of plantation stocks
14.06.2021 (themalaysianreserve.com) - Fundamental factors like inventory levels, production level and export demand will lead to a rerating of the sector
THE takeover of IJM Plantations Bhd by Kuala Lumpur Kepong Bhd (KLK) will not lead to a rerating of the plantation sector given KLK has cemented its position as one of the biggest players in the sector while factors like environmental, social, and governance (ESG) remain a major investment thematic.
“We anticipate the larger planted area, post-acquisition, can lead to potential annual earnings expansion of between 10%-12%, assuming KLK acquires up to 100% of IJM Plantations, whereas in a scenario where the acquisition is limited to the initial 56.2%, the annual earnings expansion for KLK is estimated to be between 6%-9%.
“Hence, we think this percentage of earnings enhancement is not big enough to re-rate the plantation sector,” a MIDF Amanah Investment Bank Bhd plantation analyst told The Malaysian Reserve.
Fundamental factors like inventory levels, production level and export demand will lead to a rerating of the sector, the analyst added.
“We note the plantation counter stocks are underpriced and the KL Plantation Index remains at the 7,000 level despite the rally on crude palm oil (CPO) price.
“We opine two main factors, namely ESG issues and labour shortages, could be the reason for that,” the analyst added.
The local plantation sector faces challenges in the form of European Union (EU) Renewable Energy Sources Directive (RED) and EU Policy on Forests & Deforestation.
In April, Belgium banned the use of palm oil as a biofuel in the country starting next year.
“We opine the ban on local palm oil could have an impact on Malaysia’s palm oil reputation and trade
(with some key export destinations namely, India, China and Europe). As a result, this led to the discount in valuation of plantation stocks,” the analyst explained.
The sector continues to be short of around 50,000 labour which hits production levels while the claims of forced labour practices have hit market access to new markets like the US.
Meanwhile, IJM Corp Bhd has agreed to divest its 56.2% stake in IJM Plantations to KLK for RM1.53 billion cash or RM3.10 a share.
IJM Corp will continue to be entitled to the dividend of 10 sen per share in July that was declared by IJM Plantations, exchange filings last Friday noted.
IJM Corp CEO and MD Liew Hau Seng said the proposed disposal will result in a gain on disposal of RM700 million.
“The recent strong CPO price environment and good showing by plantation companies have presented an opportune window for IJM Corp to dispose of its plantation business at an acceptable price. “The proposed disposal allows IJM to realise its value in IJM Plantations that has been underappreciated by the market, partly due to the illiquidity of the stock,” he said in a statement.
Monetising its stake in IJM Plantations would be an effective way for IJM Corp to realise the value of IJM Plantations, and in doing so, benefit all existing shareholders of the latter.
At the offer price of RM3.10, the market capitalisation of IJM Plantations is at RM2.73 billion.
The proposed disposal will also enable IJM Corp to streamline its businesses to focus on construction, property development, infrastructure concessions and the manufacturing of building materials, all of which derive synergistic benefits with one another, thereby reducing the conglomerate discount currently ascribed to its market valuation.
Liew said the net proceeds from the proposed disposal would strengthen IJM Corp’s balance sheet and see its net gearing decrease from 44% to 21.6%.
“This would enable the group to pursue new opportunities that may arise, fund existing working capital or capital expenditure requirements and reward shareholders by way of a special dividend or pursue share buyback activities.
“IJM Corp has, in the past, declared special dividends when it successfully monetised its assets,” he added.
Going forward, Liew said IJM Corp is on firm footing as we pursue our next growth trajectory.
“We have been working hard to grow shareholder value, which includes adopting a more proactive stance on capital management.
“The significant gain from the proposed disposal of IJM Plantations is expected to reduce the steep discount to IJM Corp share price and highlights sizeable value unlocking potential, given our attractive portfolio of assets,” he said.