19/07/2011 (Borneo Post) - Ongoing talks on possible merger and acquisition (M&A) exercises appear to have trickled over to other industries apart from the much-hyped financial services sector.

Obviously, with deals worth some RM122 billion being transacted last year, M&As was slated to become the ‘buzzword’ for the remainder of the year – notwitstanding these deals being closed or not.

Most notable, on the radar at the moment, would be the ‘subtle’ RM11.85-billion merger plans between SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd – a deal many expect would create the country’s largest oil and gas (O&G) services provider in terms of asset size, estimated to be around RM6 billion.

Next to closely follow these steps, according to market observers, would be the plantation sector – particularly the palm oil segment.

“Merger is a possibility for the plantation sector, but the due to the high crude palm oil (CPO) price, any M&A target right now would be expensive,” opined TA Securities Holdings Bhd’s senior research analyst, James Ratnam Ramasamy.

“That’s the most likely reason why there have not been many M&As within the sector for the past few years, despite a lot of plantation companies being ‘cash rich’,” he explained to The Borneo Post via e-mail.

While downward pressures had put a slight dampener on CPO price throughout last week, market consensus agreed upon a target for the CPO price to range between RM3,000 and RM3,400 per metric tonne this year.

Supporting this would be statistics released earlier last week by the Malaysian Palm Oil Board (MPOB), stating that June production of the commodity had increased to 1.75 million tonnes, with higher exports of 1.58 million tonnes.

“In the near time, CPO price will be dictated by the weather conditions in the US and crude oil price direction. In saying this, recent news indicates weather conditions in key crops areas in the US will be hot and dry for the next two weeks, raising risk of yields being affected.

“Additionally, high crude oil price would stimulate demand for biodiesel, particularly as the northern atmosphere enters the summer season, when demand typically peaks.

“Thus, we believe that demand for CPO will remain strong in the months ahead, boosted by the US$235 (around RM705.50) per tonne discount to soybean oil price – which is significantly above historical mean of US$120 (RM360.24)-per-tonne level – as well as weakening inflationary pressure and continuing pre-stocking activity ahead of the festivity season,” added Ratnam.

About five years ago, corporate Malaysia witnessed the consolidation of the nation’s three largest plantation companies that was slated to create the world’s largest plantation group.

The three – Sime Darby Bhd (Sime Darby), Golden Hope Plantations Bhd and Kumpulan Guthrie Bhd – along with six other public listed companies, either owned by these three companies or involved in plantations, had undertaken a merger that had created the country’s fourth biggest company on Bursa Malaysia.

Being an exercise led by Permodalan Nasional Bhd (PNB), the move was seen as an initiative to create a global company on the local bourse, at the same time, promoting operational and scale benefits that would arrive in such a merger.

It also marked the initial move towards liberalisation of government-linked companies (GLCs), where they were encouraged to divest smaller or non-core subsidiaries or assets.

“Our Prime Minister Datuk Seri Najib Tun Razak had publicly requested GLCs to divest  non-core assets and instead, focus on their areas of strengths. In this perspective, we are again eyeing Sime Darby as the top candidate,” added Ratnam.

Maintaining its ‘overweight’ stance on the plantation sector, TA Securities would continue its assumption for CPO price to remain at the RM3,425-per-tonne level.

“That said, we are currently reviewing 2011 price target as our third quarter’s assumption of RM3,200 per tonne appears to be on the high side. We continue to favour exposure to Kuala Lumpur Kepong Bhd as well as stocks with non-plantation catalysts, such as Sime Darby and Boustead Bhd,” stated Ratnam.