By TEE LIN SAY
FOREIGN funds have been nibbling on commodity-based stocks in recent weeks as prices continue to soar full throttle.
While the play on plantations isn't exactly new, it is worthwhile checking out plantation companies with good growth but are relatively unknown.
Pahang-based Kurnia Setia Bhd may be small, but its turnaround and growth potential begs a second look.
However, lack of liquidity in the stock as well as its relatively small landbank has hindered investor interest.
As it stands, Kurnia Setia owns 11,797ha of plantation land. But this is set to change.
The company targets to double its hectarage within the next three years.
It is now actively pursuing negotiations with state governments for the possible purchase of land banks or joint ventures.
Tengku Zubir (left) and Halim
“We are now exploring 3,000ha vacant land in Kuala Lipis from the state government, which we are looking to convert into a plantation land. We are also looking at possibilities in Sabah,” says Kurnia Setia's managing director Datuk Halim Ibrahim.
Kurnia Setia is essentially owned by the Pahang government. In 2005, the Pahang royal family via TAS Kurnia Sdn Bhd bought a block of shares in the company from Lembaga Kemajuan Pertanian Negeri Pahang (LKPP).
The acquisition price was at RM2 per share; Kurnia shares then were trading at around RM1.20.
TAS has since increased its stake in the company to about23%.
A new management team was also put in place. Key among them was Tengku Datuk Zubir Tengku Datuk Ubaidillah who was appointed chief operating officer in 2005.
His brother Tengku Datuk Uzir Tengku Datuk Ubaidillah was appointed to the board in 2004.
Says Halim: “We put in place better estate management practices, improved planting method and more efficient harvesting and collection, among others.”
Tengku Uzir says: “We also hired and fired. We did not renew the contracts of some of the estate managers. There was an urgent need to reshuffle and quickly turn the business around.”
Owing to these measures, the company managed to raise its efficiency levels by several notches.
Fresh fruit bunches yield improved to 16.47 tonnes per ha in FY06 from 14.55 tonnes in FY05.
Similarly, crude palm oil extraction rate has risen to 19.3% from 18.8% previously.
Tengku Zubir expects FFB yield to reach 18 tonnes in FY07 and is targeting 20 tonnes in the near future.
“Furthermore, we recently undertook a GPS (global positioning system) survey on our land bank, and we discovered that some of our plantation areas are under planted. So this means we have an extra 700ha to be planted. About 550ha will planted by this year,” says Tengku Zubir.
Earnings wise, management's effort was visible just a year later.
For its financial year ended December 2006, revenue increased 31.9% to RM56.7mil while profit after tax jumped a staggering 1,794% to RM8.9mil.
The positive performance has continued. In the first half of FY07, revenue jumped 57.5% to RM34.7mil while net profit quadrupled to RM8.9mil.
“Due to seasonal factors, our second half will be stronger than the first half. Peak harvesting happens in the second half of the year. These are exciting times for us, as 36.9% of our trees are in prime phases. Another 36.6% of trees will enter its prime phase over the next one to three years,” says Tengku Uzir.
The maturity of these trees will also coincide with the commencement of Kurnia Setia's milling operations.
At the moment the company is focussed on upstream activities, but management realises only too well the necessity to have its own mill.
“LKPP and Kurnia Setia are proposing to construct a mill in 2009 and commence operations by 2011. This will be a 51:49 joint venture respectively.”
Halim says that the proposal with the state government agency will require total investments of RM24mil.
The initial capacity of the mill is 30 tonnes/hr. The mill will support the plantation activities within Lipis district.
Tengku Uzir says capital requirements over the next two years is estimated at RM50mil, which are mainly for new oil palm estates as well as for replanting exercise, and property development works.
In the meantime, as at June 30, the group is in a net cash position of RM4.66mil.
“A cash call will be exercised as and when the need arises in the best interest of the shareholders,” says Tengku Uzir.
Property development
While plantation will be the core business of the company, Kurnia Setia is in the midst of launching its property development project in Bukit Goh, Kuantan.
About 607ha of old plantation land has been identified for development into a township.
The Seri Kurnia Mahkota township, will have a gross development value (GDV) of RM1.8bil, and will be developed over a 10-15 year period in seven development phases.
This development is located within the Eastern Corridor Economic Region (ECER) and is in close proximity to the East Coast Expressway and Kuantan-Kemaman bypass road.
In addition, it is situated within the Chenor-Gebeng petrochemical industries corridor.
“But we still want to be known as an agro-based company. The profits generated from property development will be injected into the plantation division for further growth,” says Halim.
The first phase of the township development comprises 1,200 units of residential and commercial properties with an initial GDV of RM330mil.
Zubir says that the first phase of the property launch will take place in the first quarter of 2008.
He expects more significant revenue contribution to start in 2009. The company is already in talks with a few established developers to develop Seri Kurnia Mahkota.
Meanwhile, JF Apex is forecasting the company to deliver RM28.44mil in net earnings for its full year in FY07.
This would be more than a 3-fold jump from the previous year.
These earnings would translate into earnings per share of 37.9 sen for the stock.
Based on its current share price of RM2.70, the stock is then trading at a present year price earnings ratio of 7 times.
On the basis of comparing Kurnia Setia's market capitalisation of RM203.56mil to its total hectarage of 11, 797ha, the company's per ha would be worth RM17,000.
This is still much lower when compared to the industry average of about RM28,000 per ha.
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