Stocks: Are Plantation stocks still worth looking at (with the current CPO prices hitting new highs)?

We have seen that there are many people calling for "buys" on the plantation sector due to the rising CPO prices. If you wonder where to find out on the latest CPO prices, they are mainly transacted via futures. FCPO is Malaysia's main platform to trade CPO and take delivery in future months. Hence, FCPO remains a good gauge on what will be the price for the future prices of CPO.

Below is the snippets of FCPO prices as of 28/12/2020

FCPO prices taken on 28 December 2020

So, are Plantation stocks a buy now? Let's look at the facts below before we answer the question:

1. Plantation stocks are normally trading below NTA (P/NTA of 0.3 to 0.8 times - depending on plantation size, location of landbank, productivity/age-profile of trees, lands' proximity to development and production cost per tonne). 

2. Plantation stocks are very cyclical and it normally has an uptrend during the CPO commodity price bull runs (due to a swell in earnings and potential dividend). 

3. Some of the Plantation companies like Genting Plantation, IOICorp has emerged into a developer as well due to their land being very close to "development areas". Places like Kulai and Puchong are being developed by Genting Property and IOI Properties as they were ex-estates. 

4. Production costs of FFB (Fresh Fruits Bunches) are estimated to be ~RM1,800. Due to logistical issue, cost structure of some more rural located plantation companies (especially at Sabah, Sarawak) has a slightly higher cost structure. Labour costs in peninsula Malaysia is slightly higher but at East Malaysia logistical issues often balloon the costs and also caused some FFB to degrade (hence commanding lower prices or even being dumped). 

5. Some of the bigger companies like FGV, TSH has landbanks and operations outside Malaysia (mostly all in Indonesia). Sime Darby Plantation has acquired NBPOL in 2015 hence they now operate and own palm oil plantation in Papua New Guinea. 

6. The fruits from the trees can be harvested, sent to the oil palm mill to produce Palm Oil. That is the priced asset. A young tree (normally defined as <7 years old) will yield very little FFB. Trees with age profile of 7 to 12 years old are normally deemed as young matured trees and I have read and seen some producing up to 18 tonnes/ha. The prime is said to be from 10 years of age until 23 years old where they can produce 18 to 25 tonnes of FFB/ha. This is again depending on the tree species. However, the machineries, mills and land cannot be monetize instantly. Land will take a longer time to be monetized as they need to be rezoned for other developments, divided into smaller plots and sold. The process usually take years to complete.

7. 1 tonne of FFB now sells for RM3,800 vs average production costs of RM1,800. The profit is tremendous as compared 9 months ago the average price is <RM2,500/tonne. 

8. Some of the Plantation companies are very illiquid and thinly traded. 

9. Tree stress will normally cause lower production after several months (6-9 months) of good production. Of course, dry weather is another root cause (while wet weather caused floods and harvesting issues leading to eventual reduction in production). This is one good reason on why CPO production and prices is always cyclical.

10. Windfall tax will be activated by Malaysian government (>RM3,000/tonne) and this is also a natural curb in profit. It's reported that in Jan 2021 a 8% Windfall tax will be collected.

Let's see how the companies in Bursa are being valued right now?

A truncated list of Bursa listed Plantation companies (filtered based on Market Cap)

Based on the filtered list above, you can see that the biggest players include Sime Darby Plantation, IOI Corporation, KLK, Genting Plantation is trading at P/B value of >1. One can always argued that the land have not been revalued over the years and if revalued now the book value can be higher, hence reducing the P/B value. 

In terms of P/E ratios, it might not be meaningful as months ago CPO prices were low and naturally profit is bad. 

If you observe well, most of the companies have gone up from their 52 weeks low and now trading almost at their 52 weeks high. 

Concerns

1. The share prices of most Plantation companies have risen and almost at their 52 weeks high. There is always a concern that despite the very likelihood in the hike in profits for the listed Plantation companies, it has already factored in all the good news. When the results come out, not all companies will report terrific profits (due to labour shortage factors, some companies' trees are either too young or old, logistical issues due to bad weather in Q4). Those who reports good profits might not experienced a sharp share price increased. 

2. Some plantation companies like JTiasa etc has pretty weak balance sheet. Some of the East Malaysian companies also involved in timber business and that segment of business wasn't doing well. 

3. Normalization of CPO prices. We can say that prices are market driven, so when prices rises it is due to sustained demand of CPO, the hike in price will dampen demand as well. Lower demand and potentially increase in production in coming months (especially after lots of rain from Sept onwards) could drive prices down.

4. Strengthening of Ringgit against US Dollar might put some pressure on CPO prices. The next edible oil which competes neck-to-neck with Palm Oil is Soybean and it's grown mainly in the West. Buyers buy CPO in USD and hence when RM appreciate, we will have to lower the price to compete with Indonesia.

Outlook? Is it still a buy now?

It is a difficult question to answer but our views are as below.

1. It is still possible to earn 10 - 30% profit by buying into Plantation companies. However, hoping for the stocks to double or triple up might be irrational (might happen in irrational market anyway). 

2. CPO Prices are set to come down after March 2021. The highest should be Jan 2021 which is around RM3,750/tonne.

3. Stocks are trading with a 6 months lookahead. Hence, it might be forecasting a reduction in profit going forward already. A good quarterly result might not help much in stock prices. It's the "Greater Fool's theory" in play right now as we also need to ask ourselves who is willing to buy at a higher prices.

4. If you use the "margin of error" methodology, you might not be comfortable. Margin of error might be lower now due to the price hike. 

5. If you want to take a bet, cherry-picking is the right way forward. Do make sure you read up the production of the Plantation companies (from Bursa's website as all plantation companies are required to post their monthly production figures).

Stocks: Boustead Holdings Market News and Rumours Compilation

There are many market rumours about Boustead Holdings Berhad 'potential' cooperate exercise. Below are the compilation of the news and we will do a quick analysis on those news and market 'speculations'

1. Boustead Holdings is looking to sell its shares in unlisted "The University of Nottingham in Malaysia Sdn Bhd". 

The University of Nottingham in Malaysia Sdn Bhd's sale (66% ownership) is probably one of the few options that Boustead Holdings is looking at with the target to reduce their debt, increase cash flow and most importantly simplify the company to generate profit.
https://www.theedgemarkets.com/article/university-nottingham-malaysia-owners-weigh-exit-%E2%80%94-sources

2. Boustead Holdings has named Shazalli Ramly as the new Group MD. 
https://www.theedgemarkets.com/article/boustead-names-shazalli-ramly-group-md-confirms-edge-report
The incoming MD is said to be tasked to continue with the journey to rationalized the company's effort to streamline their holdings and assist it to return to profit.

3. Boustead voice support for BHIC reporting irregularities involving the RM9bil combat ship project
https://www.theedgemarkets.com/article/boustead-voices-support-bhic-reporting-irregularities-involving-rm9-bil-combat-ship-project
While the news is definitely not welcomed and RM9bil contract (with potential mismanagement etc) is a lot of money (few times above Boustead Holdings Berhad's market cap), it is likely to be limited to BHIC as the subsidiary is the ones given the contract. The key risk remains the reputation damage as it's associated with Boustead's name.

4. Boustead Holdings expected to embark on major debt restructuring
https://www.theedgemarkets.com/article/newsbreak-boustead-holdings-expected-embark-major-debt-restructuring
From the below article, you can see that The Curve and its surrounding land (which Boustead Holdings owns) has only a book value of RM579mil. 

Quote from the article:

"Non-core assets that are likely to go

All eyes are on which non-core, low-yielding assets Boustead Holdings may sell. The group is asset-rich, with landbank, investment properties and hotels, among others. Observers say it is unlikely that it will sell its shareholding in Affin Bank.

“Affin Bank is not only profitable, but of value to the group, so I doubt it. I expect they would sell some of its property assets such as land and/or property management and some of the Royale Chulan hotels. They also have a stake in the MyTown mall, which is low-yielding,” says one who tracks developments at the group. Boustead Holdings has a 50% interest in MyTown Shopping Centre in Kuala Lumpur.

While there is concern that Boustead Holdings’ assets may not be able to fetch a good price amid the current economic downturn, it is understood that the group does not plan to sell them in haste.

In its 2019 annual report, topping the list of the group’s most valuable properties is five hectares of commercial freehold land on which The Curve mall sits and the building, which have a total book value of RM579 million.

Boustead Holdings, which has been reporting losses since the financial year ended Dec 31 2018 (FY2018), saw its net loss widen to RM1.28 billion in FY2019 from RM554.3 million the previous year, after taking an impairment charge of RM1.33 billion for assets from the heavy industries and plantation segments. Revenue for FY2019 rose a marginal 1.4% to RM10.33 billion.

It had a debt-laden balance sheet, with total borrowings amounting to RM7.91 billion as at end-2019 compared with its shareholders’ equity of RM3.74 billion. Cash and cash equivalents stood at RM893.8 million"

5. Potential Privitisation
a. Comments in i3Investor's forum/comment section
There were plenty of comments in i3 portal claiming privatization of Boustead will happen before Feb 2021 at a price of RM 1.10. This is below the NTA but way above the current depressed prices. Whether or not the offer will come, when is it and will it get the the buy in of smaller shareholders (majority shareholder is LTAT), only time will tell.

b. Previous news on potential privitisation (in June 2020)
There are several announcements made on LTAT's intention to privatise Boustead Holdings and restructure it. This excercise will help in effort to pare down debts, rationalize non-core, non-performing assets (i.e. hotels, lands, shopping malls) and at the end make Boustead Holdings a leaner company with better profit prospects.

https://www.theedgemarkets.com/article/hurdles-mount-ltats-potential-privatisation-boustead

https://www.theedgemarkets.com/article/rm660m-deal-privatise-boustead-holdings

*The above comments are just research done by one of our contributors. All investors are advised to study and make their own recommendations before making any purchase of the stock.

Stock Analysis: Boustead Holdings Berhad

Recently there is an escalated interests in Recovery Stocks and we do see some of them had a good run. I am going to do a quick analysis on Boustead Holdings Berhad as I realized that there isn't much of interest owing to the shareholding structure and a huge unlisted and listed companies under the big umbrella Boustead Berhad. 

According to their 2019 Annual Report, Boustead Holdings listed their subsidiaries under Page 262. There are a long list of companies and I will put down the major ones in the below table.

Boustead Major Subsidiaries and Affiliates

You can see from the above table that Boustead has 4 listed subsidiaries and affiliates, namely Boustead Plantations, Boustead Heavy Industry and Construction, Pharmaniaga and Affin Bank Berhad. There have a tonne of unlisted entities which will include the University of Nottingham in Malaysia, Cadbury Confectionery Malaysia, Sissons Marketing, Kao (Malaysia), Mutiara Rini (think Mutiara Damansara), Hotel and Resorts, BHP Petroleum, IKANO etc. 

On 3rd Dec 2020, the closing price is RM0.625 and command a market capitalization of RM1,267mil. I compare the market cap of the 4 listed companies look at how much they are worth. If I add all the corresponding value (percentage owned by Boustead Holdings), the collective market cap is RM2,377mil and Net Tangible Asset is RM 3,760mil. One of the main reason is Affin Bank Berhad is trading at 1/3 of the NTA. 

What do you get for paying RM0.625 per share for Boustead Holdings?

By paying RM0.625/share for Boustead Holdings, essentially you're also buying a portion (based on how much Boustead Holdings own) of the 4 listed companies at a steep discount (i.e. 66% discount to the NTA, 47% discount to the listed Market Cap). On top of that, you get a bunch of companies (I mean a whole bunch of them) free of charge. Is this a good value investing? It's a not a straight-forward answer but let's find out further below.

Earnings vs Value Trap
No doubt that Boustead Holdings has a long list of companies under it and also lots of valuable asset, the earnings were not so fortunate. 

Boustead Holdings: Last 5 years Quarterly Profit (after Taxation)

As you can see, profit for Boustead Holdings has been on the downtrend for the past 2-3 years and in Q4 2019, there is a big write down. However, the losses seemed to be under control now and businesses is slowly stabilizing. 

Boustead Holdings is definitely a bargain from Value Investing perspective. However, due to its sluggish earnings, it could also mean that it is a Value Trap for many. Now, let's look at who are the largest shareholders.

Boustead Holdings 5 largest shareholders

What Lies Ahead?

Recently, Boustead Holdings has announced that Dato’ Sri Mohammed Shazalli Ramly will be their new Managing Director. As you can see that Boustead Holdings is currently deemed as a 'conglomerate' and 'holding company', valuation is not exactly attractive. Also, a lot of their businesses are suffering or it's not efficient and generating good profit. 

1. Potential Restructuring and Sale of Non-Core, Non-Strategic, Non-profitable Asset.

There were market talks that the majority shareholder, LTAT is looking into possibility of restructuring Boustead Holdings. There are certainly a lot of unlisted and listed assets that Boustead Holdings can look forward to monetize and pare down loans and save on interest costs. This exercise will bring value to existing investors.

2. Potential Privatization

Boustead Holding due to its very attractive and deep value is very ripe for privatization. Privatization will allow majority investor to perform restructuring easier and also unleash the value within the holding company. 

3. Recovery in businesses 

Businesses of Boustead Holdings are slowly recovering post MCOs. 

For those investors who are patient, I believe that this could mean a meaningful bet.