Background

Boustead Plantation (BPLANT) was listed in Bursa Malaysia in mid-year of 2014. This was a result of a merger of between Boustead REIT (Al-Alaqar REIT) with plantation division of Boustead Holdings Berhad. The decision to list BPLANT as a combined entity was in order to sustain the growth of Boustead's plantation segment and to get rid of major drawback of reit stucture of which only a small portion of money is left for reinvestment, since the requlatory requirement enforcing that 90% of income needs to be distributed to shareholders.   

Since listed, BPLANT becomes one of the top five plantation stocks in Bursa Malaysia. Boustead Holdings remains as a major shareholder of BPLANT, controlling at about 57% stake. Another major shareholders are Lembaga Tabung Angkatan Tentera (LTAT) (which is also the ultimate shareholder of Boustead Holdings) and Lembaga Tabung Haji. Both LTAT and Tabung Haji are hungry for dividend income. LTAT recent dividend distribution to its members was 12 percent (2017) and it is arguably very attractive and above average. Lembaga Tabung Haji meanwhile as the sole pilgrimage fund for muslim in Malaysia needs to generate more cash from its investments to continue attracting the muslim majority population in Malaysia to save money in Tabung Haji. 

BPLANT for the past few years continued to reward its shareholders handsomely with higher than average dividend yield than the rest of plantation stocks. The dividend per share for year 2015 and 2016 were 13 sen and 14.5 sen respectively. These dividends translated into a yield of more than 8% per annum, in fact were higher than many of listed REITs. Financial Year End 2017, the dividend announcements gave a total of 15.5 sen including 7 sen special dividend. 

Last January market correction started in US markets had spilled over all around the world including Malaysia and pushed down KLCI  54 points at its peak and sent a chilling effect across Bursa Malaysia boards. However, BPLANT stock prices remained sturdy. With the history of high dividend yield, BPLANT is considered as an income stock. The main point is, it is important to have one or two income stocks in one’s portfolio to cushion against major market correction and besides there is benefit of receiving cash from dividends distribution. This cash can be reinvested in stock market and gain from buying stocks at low (or average down) without the need to sell other stocks currently at loss (presumably, particularly growth stocks usually hit hard during market correction).

Nevertheless, looking at BPLANT financial results, it is not hard to raise question regarding the sustainability of its current dividend payout in the future. Management guidance stated that they intend to distribute about 60% dividend payout from its earnings. However, so far they had given out almost all earnings as dividends. Not only that, most of the earnings in the pasts were from gains in land disposal. This is not a sustainable action for a plantation company. Moving forward, to sustain high dividend distribution to its ultimate stakeholder, LTAT, BPLANT needs to acquire more lands for planting crop. Recently the company announced its intention to buy 11,579.31 hectares agriculture land from Dutaland’s subsidiary for a total purchase price of RM750 million.

Based on my reading in some news articles, an analyst raised question about the price tag of the land purchase as too costly given that the Fresh Fruit Bunch (FFB) yield from the land is below average (48% below Boustead plantation FFB yield in Sabah) and the crop age profile mostly are over its prime age. This requires massive capex to restore the fertility of the land and replanting exercise. BPLANT management stated that they will fork out additional RM250 million for the next 10 years for that purposes. 

BPLANT Purchase palm oil land in Sabah from subsidiary of Dutaland-Analysis

First of all I would like to make a statement that I am not an expert in this area, this is just my own assumption based on available information that I have and I will try my best to model it in the most acceptable and sensible way. So, please do not take my analysis as a recommendation, view it as an opinion sharing and make your own analysis before making any investment decision.

Value of Land using Comparables

source: https://www.brickz.my/transactions/agriculture/sabah/sandakan/jalan-labuk/landed/view/map/

I rely on the free online website giving out recent land transactions in Sandakan region close to the target land.

Latest Palm Oil Land Transactions 

Since the price references are based on acres so I have converted the BPLANT land purchased into acres too.

Hectares=11,579.31

Equivalent in Acres= 28,613

Using above transactions, I work out the price metrix as below to determine the market value of the target land:-

Based on that information as my reference, I can safely conclude that the land purchase was not expensive and in fact below market value. Even by using the lowest transacted price per acre, the price tag remains under market value. 

However, my armchair analysis ignores some material facts:-

1. I do not make site visit to those sites, which can raise question about comparability of those transactions with the target land. Maybe the target land is more remote than the reference land transactions and some other material differences.

2. The size difference is another major factor, bulk purchase usually much cheaper than small purchase.

3. The historical transactions might not be at par with the market value, some purchases might be with related party which can be exchange at below fair value or maybe some transactions are liquidation sales. Some transactions might be at premium for example take over and merger exercise. 

Land Valuation using Net Present Value (NPV)

Again I would like to state here that I am not an expert and very open to any suggestion about my analysis here.

My assumptions are:

Purchase price RM750 million, management guidance CAPEX RM250 million in next 10 years

Management guidance also stated that based on their experience the yield will return to optimal in three years

Leasehold period remains=70 years

long term CPO and Kernel Prices= RM2500

Benchmark OER= 21% KER=4.4% 

Benchmark FFB yield per hectare= 17 MT (BPLANT Sabah region average yield), after 10 years, 20 MT/ha (MPOB industry benchmark)

Debt Interest Rate= 5.5% 

Required return equity=7%, this is based on historical beta of 0.46 and Risk free 3.6% and Market premium 7.4%

Please bear in mind that in any financial modelling, rubbish in is rubbish out. There is no perfect modeling as there are a lot of factors that can impact the model. The business is also in dynamic environment and there is ever changing in weather, technology, international markets, government policy, just to name a few.

*Discounted Terminal Value

NPV, assuming BPLANT is keeping the land forever is negative, ie a bad investment decision.

Here, a few points I want to raise:-

1. WACC in this model is based on what I assume as the optimal capital structure in financing the purchase (60% debt and 40% equity). Based on present financial condition of BPLANT, that assumption is not that bad since present gearing ratio is minimal.

2. The main weight that affecting the calculation is the terminal value. My assumption is based on BPLANT keeping the land forever. But the value of land will rise over time, particularly after BPLANT has restore the land to its prime condition. 

Just a very simple assumption that BPLANT can sell the land at end of year 11 at RM1.14 billion (based on lowest comparables market value today). NPV will be:-

New NPV = -241,049 - 493,478 + (46,159+1,141,000)/(1.053)^11

New NPV= -61,865

Still negative but at lower figure. But the land in 10 years surely will be worth more than RM1.14 billion particularly after the replanting exercise. Any upside change to the terminal value is favourable.

3. My depreciation assumption is understated since I do not separate the cost of land into building, equipments/machineries (shorter useful life). Hence, the cash flow assumption will be understated too, since less tax saving is accounted for.

4. My other assumptions are arguable too. But a model is meant to be just a guidance, not absolute truth, plus many infomation is not available to the public, for example what is the synergy that management expects to get? Since BPLANT has existing estate in the same region, there will be some benefits from economies of scale to present. 

Conclusion

The land purchase is acceptable for me, even though some analysts might question the purchase price tag, but based on my analysis including the view that sizable land purchase is scarce, I back the management action. In order to grow the business income, BPLANT needs to expand its agricultural land bank.

BPLANT VALUATION

My expectation for 2018, BPLANT can generate core EPS of 5 sen per share, I expect BPLANT will continue to sell some lands and hence can afford to distribute dividend of at least 10 sen per share. Based on my model for land purchase in Sabah, after restoring the land to its prime condition, BPLANT can generate additional core EPS of around 3 sen. Spending about RM1 billion (including replanting) in order to produce additional core EPS of 3 sen. I think moving forward BPLANT needs to spend additional RM2 billion financing with combination of bond issuance, internal operating cash flows and land disposal of its valuable freehold lands to bring in a total of core EPS to 14 sen. 

Based on payout ratio of 70% (even though management guidance 60%), growth rate of 2%pa (productivity) and required return of equity 7%, the target price over long term is RM1.96 per share (upside 16%). The dividend yield will be in line with average yield of listed REITs.