Thursday, 10 December 2015

Oil Palm Rising Star: MKH

MKH, a property developer based in Klang Valley, diversified into oil palm plantation in Jan 2008 when it acquired 100% of SJL Utama Pte Ltd which has 95% stake in PT Khaleda Agroprima Malindo who owns 15,942 hectares of plantation land in East Kalimantan.

It started its planting program straight away and it was completed in just 4 years time.

The table below shows MKH's total planted area reported in its annual report.

Year New Planting (ha) Total Planting (ha)
2008 3500 3500
2009 6000 9500
2010 4300 13800
2011 1400 15200
* Total planted area revised to 14,400ha in 2013

Its first palm oil mill with capacity of 60MT/hour was completed in 2011.

CPO was first produced and sold in year 2012 which generated its first revenue from plantation at RM44.9mil.

It was also the first time its operating profit turned positive (RM660k) since it ventured into plantation business 5 years ago.

In FY2013 (ended 30 Sep13), MKH revised its total planted area to 14,400 ha, down from 15,200 ha reported previously.

Its FFB yield improved to 16.0 MT/ha in 2013 from 11.6 MT/ha in 2012 as more trees turned mature.

Its OER also rose from 19.5% to 21.7% in the same period of time.

In FY2014, its FFB yield and OER improved further to 21 MT/ha and 22% respectively.

FFB harvested in FY14 stood at 295,000MT, up from 222,000MT a year ago.

The figure reached 370,000MT in FY15.

It has also completed its POM upgrade to 90 MT/h in 2014.

CPO & palm kernel sales volume increased from 76,600MT in FY14 to 108,900MT in FY15.

The table below shows MKH's past performance in its plantation segment (in RM mil):

FY Revenue PBT PAT Adj PBT
08 0 -2.4 -2.3
09 0 -4.6 -5
10 0 -4.5 -4.3
11 0 -8.7 -6
12 44.9 0.07 -1.6
13 101.1 -44.9 -36.9 4.7
14 164.8 22.2 14.9 40.3
15* 209.5 -29.7
* not audited

As expected, revenue from plantation segment increased progressively & brilliantly since year 2012 as more trees entered maturity.

However, its earnings were quite disappointing as it suffered pre-tax losses most of the time due to forex loss caused by significant weakening of IDR & MYR against USD in recent years.

Excluding this forex loss, it actually registered pre-tax profit in 4 consecutive years since FY12.

Its adjusted PBT (exclude forex) in most recent FY15 dropped 80% compared to FY14 despite higher revenue, mainly due to significant weakening of CPO price.

So, oil palm plantation business could be unpredictable because of fluctuating CPO price and forex issue as debt is usually high due to high capex.

As a rule of thumb, we expect oil palm tree to become mature and ready for harvest after 3 years (young mature) and reach prime mature after 8 years.

Since MKH started planting in 2008 and completed planting in 2011, its tree age will range from 5 to 8 years old now in 2015.

All the trees started to be harvested but most still haven't reach prime age.

So we can expect its FFB production to grow further for another 3-4 years until it reaches a plateau.

I think FFB yield of 25 MT/ha once fully matured is a very good yield. If we apply this yield to MKH's 14,400 ha plantation size, we can get 360,000MT a year.

However, its FFB produced is already at 370,000MT in FY15 even the trees are not in their prime age...

Subsequently , MKH will enjoy the recurring income from sales of CPO/kernel with minimal extra cost for another 15-20 years.

If the CPO price is high, then it will earn more. If CPO price fall, it will earn less.

I feel that MKH is an efficient planter as it could finished its planting program as planned. Most planters set a planting target but ends up planting less than half of target.

Besides, its FFB yield and OER are quite impressive given the fact of its average tree age is just about 6-7 years.

The less attractive part of MKH's plantation segment is that it has stopped planting since 2012 as there is no more plantation landbank.

Its 14,400 ha of plantation size is also relatively small.

It might acquire more landbank for plantation in the future but the growth has been interrupted.

MKH is supposed to to have a tough time in 2015 as both property and plantation sectors in Malaysia are suffering during this time.

However, its property segment actually did extremely well with record-breaking sales of RM850mil in FY15, up from about RM820mil in FY13.

Its property unbilled sales also reached a record high at RM920mil as at end of Sep15, compared to RM823mil at end of FY14.

So, we can expect its core profit to increase in the next few years, contributed by both property & plantation segments.

MKH recently expanded its development landbank by acquiring 130 acres of land in Kajang for RM239mil which is payable to land owners in 8 years.

This land has an estimated GDV of RM1bil and it will boost MKH's future GDV to RM12bil.

Its recent collaboration with PanaHome also looks interesting.

For its FY15 ended Sep15, MKH's revenue breached RM1bil mark for the first time, but PATAMI drops 17.5% from RM104.7mil to RM86.3mil.

However, FY15 is undoubtedly its best year if we factor in higher forex loss of RM37mil in its plantation segment (RM18mil loss in FY14) and lower fair value gain of RM9mil in its hotel/property investment segment (RM22mil gain in FY14). 

As I don't expect MYR/IDR to weaken like 2015 in 2016, MKH's bottom line is very likely to break new high in the next 2 years.

Personally I would expect its FY16 PATAMI to be at least RM100mil. This means projected EPS of at least 23.8sen base on 420mil shares.

As at end FY15, its net debt/equity ratio is 0.48, NTA RM2.63 and its operating cash flow is good.

Current share price of RM2.34 is not too high in my opinion.

After breaking new property sales record, can it better it or at least maintain this sales level in the coming years? This remains a little concern to me.

However, with its strategic landbank and high future GDV, the long term prospect of its property segment should be good.

As for its plantation segment, it's in autopilot mode.


  1. Thanks for sharing, very comprehensive & in depth. Property like u said is going to be plateau or even going down in near term, no body knows. For plantation, I have a friend who works in KLK once shared with me his opinion. According to their team, the world demand is still growing and Malaysia has the best management and R&D in this field. However Indonesia is actually massively producing and competing with Malaysia, and therefore many giant plantation companies are moving there. Once Indonesia has master this field, we will face very steep competition

    1. Thanks. CPO inventories at recent record high, looks like CPO price will stay lowish in the near future?

  2. I suppose you are looking for plantation and O&G companies like what you mentioned in last monthly report :)
    If FY16 projected EPS is 23.4sen, the fair price would be ~RM2.40 (if given PE=10). It seems the upside is not much if compared with the current share price of RM2.34...unless CPO price surges or RM strengthen to reduce forex loss in FY16. But, both scenarios seem not likely in short/medium term..
    I am getting more and more bearish on crude oil and CPO price, and that reminds me of what a guru has said: "the price would rebound when everyone in market turn bearish". Are everyone like me turn bearish now :)
    I only have one O&G company- Coastal in my portfolio now.

    1. May be now it's not the time to buy plantation stocks yet. I should wait for lower price as a "margin of safety".

  3. Good write up. Thanks for sharing.

  4. hi BD, mind looking at dolomite?

    1. This company is all about its recently started thermal power generation in China. If it can generate core net profit of >RM10mil a year from it, then it will be good to buy at current share price of 43sen. However, I don't even know whether it is profitable or not. It has to serve the huge borrowings interest.

      For me, it's a bet on how much profit it can get from the power business. Personally I think the risk is not worth taking as its debts are way too high. Anything goes wrong either within its operation or the macro environment will put it in big trouble.

  5. when the cpo price is lacklustre, u should choose plantation counters with mature tree age profile over young age.

    Taann is the best plantation counter hybrid with plywood and logging

    1. I'm looking for "underestimated" plantation company with high growth potential (means young trees). So basically I will invest long term, and hope current CPO price and stock price to drop further now. Later when increasing CPO price coincides with increasing FFB/CPO production, then it can be explosive :)

      I agree that Taann is a good company.

  6. Export theme play is out. New theme play is Construction & Plantation, may soon followed by Property.

    Thanks BD for recommending MKH

    1. Actually I'm not recommending the stocks I write. I did the research for myself and just share it here :)