Boustead Plantation IPO: Is RM1.60 Certainly A Good Price?

Boustead Plantation (BPLANT) is going to be listed in 2 days time on  26th June 2014. It seems to be in a good timing as plantation sector is gaining upward momentum because CPO price is expected to move up further.

BPLANT will raise RM1.05bil from its IPO at RM1.60 per share. Its total paid-up shares will be 1.6 billion after some corporate exercises and then IPO.

Is BPLANT a good company to invest in?

Specifically for a plantation company, I would look more into a few criteria such as:

• Growth prospect
• Unplanted reserve
• Tree age profile
• Replanting strategy

• Management efficacy
• FFB yield
• OER
• Gross margin 

Boustead's Estates & Mills:

• Total 41 plantation estates & 10 palm oil mills (all in Malaysia)
• Total 86,363 ha of land (70,991 ha planted, 5,494 ha unplanted)
• Total mills capacity 415 MT/hour or 1.96mil MT/year

The unplanted land reserve is limited...

Tree age profile:

Age profile	Years	%
Immature	0 – 3	7.4
Young mature	4 – 9	16.6
Prime mature	10 – 20	59.3
Past prime	21 – 25	15.8
Replanting	> 25	0.9

From the age profile above, its future growth potential is not so exciting, as 76% of trees are already at or over prime age.

Expansion:

• Plan to expand by 10,000 ha in 3 years, 20,000 ha in 5 years
• Plan to replant 4,375 ha in year 2014/15

It is a 15-30% expansion of plantation area in 3-5 years.

       Location of estates & mills

For me, BPLANT's future growth is not exciting. Anyway, how efficient is BPLANT running its estates & mills?

FFB yield:

• With high percentage of mature trees, its overall FFB yield is still below national benchmark. Not impressive.

OER:

• Overall OER is slightly above national benchmark from 2011 to 2013. This is good.

Gross margin:

• BPLANT's gross margin 2011: 33.3%, 2012: 22.4%, 2013: 15.1%. It is in declining trend to a lowish 15%. The low CPO price surely has a major effect on it.
• Compared to gross margin of some peers chosen randomly (year 2013 figures), BPLANT is not good but not too bad either.

• UTDPLT: 39.5%
• KULIM: 32.1%
• THPLANT: 24.7%
• IJMPLANT: 23.7%
• KMLOONG: 19.4%
• IOICORP: 18.1%
• BPLANT: 15.1%
• KLK: 12.5%
• SOP: 10.5%
• FGV: 7.0%
• BLDPLANT: 6.0%

Lets check how did BPLANT perform for the past 3 years.

FFB & CPO production:

• FFB & CPO production are flat from 2011 to 2013, as 75% of trees are in prime age and may be biological tree stress from dry weather in 2013.

Financial results:

• Revenue & gross profit are declining from 2011 to 2013, due to weak CPO price & no growth in FFB/CPO production
• PATAMI rose YoY in 2013 mainly due to a RM92.8mil gain on disposal of plantation assets.
• ROE in 2013 is at a decent 11.6% but it is also heavily affected by the special gain.

Debts at 31 Dec 2013:

• Cash: RM32.3mil, Loans: RM977.4mil, Net D/E: 0.53
• After IPO, Cash: RM587.2mil, Loans: RM977.4mil, Net D/E: 0.17

Overall, BPLANT's recent performance is only average for me.

Is the company worth to invest in? Is the IPO price fair?

Its net asset per share after IPO is RM1.43, so the IPO price at RM1.60 is 12% higher.

Base on 2013 earning of RM161.5mil, EPS of 2013 will be 10.1sen. Thus PE ratio at RM1.60 per share is 15.8x. Because of this, the director said that IPO at RM1.60 "is certainly a good price".

However, as mentioned earlier there was a one-time special gain of RM92.8mil in 2013. Without this huge special gain and with high finance cost in 2013, I think BPLANT's PATAMI should be around RM80mil. 

So the EPS should be cut by half to 5sen and PE at RM1.60 per share should double to 32x.

Anyway, CPO price has advanced in 2014 and BPLANT's earning should pick up as well.

HLIB has projected BPLANT's core net profit in 2014 to be RM119.9mil. With this figure, EPS is 7.5sen and target price will be RM1.13 if fair PE is 15x.

BPLANT has just announced its FY14Q1 results. Its PATAMI of RM30.1mil is a good 36% higher than previous year's RM22.1mil.

However, revenue just increases by 3.3% YoY to RM198.6mil. Higher CPO price YoY but flat revenue, has FFB & CPO production dropped??

Anyway, gross margin improves to a good 27.5% which is great. 

If we annualize the PATAMI, it will be RM120mil for FY14 which is similar to HLIB's forecast above.

       Boustead Plantation CEO & Chairman

So for me, BPLANT at RM1.60 is not a good price, unless it has a very strong growth prospect with many immature/young trees or eye-popping acquisition. However, it is not the case.

The only good surprise is its dividend payout policy of at least 60% of net profit. If it were to register RM120mil net profit in FY2014, then dividend will be at least RM72mil or 4.5sen per share. 

Nevertheless, this works out to be only 2.8% dividend yield at IPO price of RM1.60.

With this high dividend payout, it is also unlikely that the company will grow in an aggressive way, even with the money from IPO.

Overall, BPLANT is not a bad company. It's just not my cup of tea in term of investment as I like growth more. 

Almost all plantation stocks are traded at high PE well above 15 currently. So RM1.60 for BPLANT might seem to be fair. To invest in it or not will depend very much on your investment style.