Rated a buy

WHILE THE fundamentals of crude palm oil (CPO) remain solid and the prospect of biodiesel usage is likely to spur further demand for the commodity, these factors could have already been priced into the recent strong price action of plantation stocks. According to local stockbroker OSK Investment Research, the sector is no longer cheap as practically every laggard plantation stock has already rallied. Under such circumstances, stock picking is indeed crucial and investors are likely to scout for those whose valuations are still lower than the rest as they present a lower risk proposition.

According to another local research house, CIMB Investment Research, one such stock which is still worth a buy is BLD Plantation Bhd. The research house has recently initiated coverage on this small- cap plantation stock with a `buy' call and a target price of RM2.60, based on an FY2005 price earnings (PE) ratio of 7.7x, which places the stock at a 50% discount to the sectoral average of 15.4x. With the sector having rallied strongly, it's not surprising that BLD Plantation with its still low pricing is favoured as an alternative to the larger-cap plantation stocks. Still, with just a small planted landbank, this Sarawak-based plantation company will find it hard to capture the attention of the larger institutional funds in the country.

BLD is a Sarawak-based investment holding company whose subsidiaries are involved in the cultivation and processing of oil palm, sales of related products, integrated composting process and other ancillary activities. The company was listed on the main board of Bursa Malaysia on July 21, 2003 and is 43% owned by the Lau family. Datuk Seri Dr Lau Hui Kang is one of the founders of BLD and has been its managing director since its inception. To his credit, the 79-year-old Lau has indeed successfully transformed the company from a timber-based company into a profitable oil palm planter. His son, Datuk Henry Lau Lee Kong, is now an executive director of the company and looks set to continue his father's legacy.

The group is now mainly involved in oil palm cultivation after phasing out its involvement in the timber business in 2004. BLD owns and operates 50,900 hectares (ha) of land designated for oil palm cultivation in Sarawak. However, only 33% or 16,600 ha of its landbank is planted, and out of this, only 9,300 ha are matured. The group also operates a 60 metric-tonne palm oil mill in Sawai Land District, Sarawak.

The group's estates are relatively young (see Chart 1), with 63% of its estates aged below eight years old. BLD achieved an FFB yield of around 18 tonnes/ha in 2004, which is slightly below the industry average of 18.6 tonnes/ha for Malaysia, because of its young estates profile. According to CIMB Research, the expectation is that the FFB yield will increase by 5% to 10% per annum in line with the maturing trend of its estates. On the other hand, the group's mill is fairly efficient with a utilisation rate of above 90%. Meanwhile, the group's oil extraction rate is 22.8% and its palm kernel extraction rate is at 5.2%. These numbers are broadly in line with the industry average, says CIMB Research.

Weaker earnings in FY05 as CPO prices head south

CIMB Research expects BLD's FY05 net profit to decline 7% as stronger FFB output from the estates will not fully cover the likely lower CPO price for the year and the rising cost of production. The research house expects the group's average CPO price to fall by 9% in FY05 to RM1,450/tonne due to a stronger output of edible oils by Malaysia and the United States. The likely poorer financial performance has, in fact, been reflected in the group's weaker quarterly results. First quarter (1Q) FY05 turnover fell 21% and net profit dropped 29%, while for the half-year results, there was a 16% drop in revenue and a 5.5% decline in net profit.

Brighter earnings prospects for 2006 though

However, BLD's earnings per share (EPS) is poised to recover by 10% in 2006 due to the anticipated rise in CPO prices and FFB output. Slower growth of global edible oil output, coupled with rising demand for biodiesel, is expected to drive its average CPO price achieved to an average of RM1,500 per tonne in 2006, assuming an average ringgit exchange rate of RM3.55/US$, says CIMB Research.

Room for expansion

The group has approximately 34,300 ha of plantable land reserves for future expansion. In the immediate term, the group is looking to plant around 1,000 ha of estates per annum only. BLD also plans to build a refinery. According to CIMB Research, BLD should be able to finance the development of new land areas on a progressive basis given its positive cash flow generation and its RM9.1 million net cash position as at end- FY04.

The risks

The major issue in relation to investing in the stock could be the poor liquidity of the shares, says CIMB Research. Note that the major shareholder owns a 42.4% stake and the top-30 shareholders collectively held 83.2% of the company as at May 4, 2005. The average daily turnover in the past year has only been 33,900 shares. Another foreseeable risk could be the highly cyclical and sensitive nature of CPO price movements, which have a bigger impact on the group as it derives close to 100% of its earnings from the plantation division.

In addition, CPO produced in Sarawak is also subject to a CPO sales tax, which lowers BLD's profitability compared with its peers whose estates are located in Peninsular Malaysia. The Sarawak Government levies a sales tax of 5% for every tonne of CPO produced and sold at or above RM1,500/tonne. The sales tax is 2.5% for CPO sold at an average price of RM1,000- 1,500/tonne.

The valuation

According to CIMB Research, the stock is trading at 6.4x FY05 PE, which is undemanding relative to the plantation sector's average PE of 15.4x for the calendar year (CY) 2005 (see Table 2). A possible reason for the huge discount could be due to BLD's poorer share liquidity and smaller planted estates relative to the bigger-cap plantation players such as IOI Corporation Bhd and Golden Hope Plantation Bhd. Nevertheless, the research house has put a `buy' rating on the stock with a target price of RM2.60, based on a forecast FY2005 PE of 7.7x.

This still places the stock at a 50% discount to the sector's average PE of 15.4x, implying a wide buffer for any upside. Besides, the research house also notes that the stock is supported by its 4% dividend yield and a 46% discount of its share price to its net tangible asset (NTA). With its small base and low share liquidity, BLD is not likely to appeal to large institutional funds, but for the smaller funds and retail-based investors, the stock sure looks like a bargain if pricing is the only consideration. A catalyst for the stock could be a more aggressive approach by management to grow the group's huge reserve landbank, a likely boost that investors will surely look forward to for BLD in the future.

Copyright 2005
Provided by ProQuest Information and Learning Company. All rights Reserved.

View more issues: Oct 1, 2005, Oct 16, 2005, Nov 16, 2005

James S "Rated a buy". Malaysian Business. Nov 1, 2005. FindArticles.com. 05 Jun. 2008. http://findarticles.com/p/articles/mi_qn6207/is_20051101/ai_n24909335