Mergers and acquisition value for 2022 fell by 77% in the plantation sector but could pick up momentum in 2023 if CPO price stays at or below ~MYR4,000/t price levels says Maybank IB.
SMID caps remain undervalued relative to the latest transacted physical prices for oil palm estates, and even more so for planters with strategic landbank that offer alternative use such as property development. Undervalued SMID caps such BPLANT (BUY) and TAH (BUY) offer attractive value propositions.
There was just MYR0.97b worth of M&A announced in 2022 while the 2021’s M&A activities worth MYR4.28b was an abnormality added Maybank IB, this was skewed by the successful privatization of IJM Plantations (delisted on 6 Dec 2021) that cost KLK MYR2.6b in cash for a 95% equity stake.
The most notable M&A deal in 2022 was the proposed sale of 384 ha of freehold land in Kapar, Selangor by SDPL
(HOLD) to SDPR for MYR618m cash or MYR1,609,472/ha (pre-land conversion). The high transaction price, at ~25x the average physical, transacted prices of MYR64,791/ha in 2021-22, was due to the property development value potential at Kapar.
The motivation for M&A stems from, commitments to “No Deforestation, No Peat and No Exploitation” by established planters translating into increasing interest in brownfield land (vs. greenfield which can be time-consuming, and environmentally and socially sensitive); Scarcity of strategic land; Rising cost pressures and workers shortage which likely hastened industry consolidation as smaller planters lack economies of scale; and An under-appreciation of the value of SMID cap planters.
As CPO price and equity valuations have come off their peak (from the highs in 1H22) to ~MYR4,000/t price levels, Maybank IB believes this will fuel more M&A activities in 2023. There are attractive valuation gaps between the transacted physical prices (2021-22 average: MYR64,791/ha) and the equity values of many SMID caps. The SMID caps that were observed trade at implied unadjusted EV/ha of just MYR14,500-35,000, which are at or below their replacement costs.
Overall, 68% of the KL Plantation index constituents trade below 1x PBV (as at 31 Dec 2022). HAPL remains a good privatisation candidate
Undervalued SMID caps will once again be potential M&A and/or privatization targets. Based on Maybank IB’s universe of coverage, the research house believes BPLANT remains undervalue as it trades at just 0.49x PBV, 0.37x P/RNAV, and EV of MYR30,906/planted ha. Its major shareholders own a combined 68.8% equity stake in BPLANT [57.4% by Boustead Holdings (BOUS MK, Not Rated) and 11.4% owned by LTAT (the holding company of BOUS)]. One notable privatisation candidate is Hap Seng Plantations (HAPL MK, Not Rated) as it trades at an attractive EV of MYR33,255/planted ha, PBV of 0.81x, and with a net cash of 54sen/sh. Hap Seng Consolidated (HAP MK, Not Rated) owns 74.9% (after adding 15% in 2021) in HAPL.
