Is BPlant one of the better Bursa Malaysia stocks?
Value Investing Case Study 17-1: Investment thesis for Boustead Plantations.
Boustead Plantations Bhd (BPlant or the Group) is an established oil palm plantation company in Malaysia.
BPlant is currently trading at RM 0.58 per share (as of 30 Jul 2021) compared to its NTA of RM 1.16 per share (as of the end of March 2021).
Does this price imply that BPant is one of the better Bursa Malaysia stocks to invest in?
We have to differentiate between a good company and a good investment. A good company is one that is fundamentally strong. A good investment is one that enables you to make money.
You would think that a good company is then a good stock. But it is not the case. You can have a company that is facing some problems. But if the share price is such that there is a margin of safety even with the poor fundamentals, it would be a good investment.
Join me as I show that this describes BPlant. To serve as a template for your own analysis, I will present my findings in the form of an investment thesis.
Should you go and buy it? Read my Disclaimer.
Contents
- Investment Thesis
- Rationale
- Supporting details
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Investment Thesis
Since its re-listing in 2014, the Group has not generated profits from operations. The majority of the profits have been from the sale of land.
There was a new team both at the Board and senior management levels in 2020 to address growth and shareholders value creation.
These improvement efforts will take some time. In the meantime, the Group is not burning cash. The Debt Equity level is 0.5 and the cumulative Free Cash Flow is positive from 2013 to 2020.
While there was an asset impairment in 2019, I do not expect further impairment. This means that there is enough margin of safety with the NTA of RM 1.16 per share.
This is a cigar-butt investment with the bet that if management turnaround the operations, there would be the Earnings Value upside. A potential sale of BPlant by its holding company could also be a catalyst for re-rating. These are why BPlant is one of the better Bursa Malaysia stocks to invest in.
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| Chart 1: Valuation |
Rationale
- From 2013 to 2020, the profits came mainly from the sale of land. From an operations perspective, the Group incurred losses. Not surprising, BPlant had not been able to create shareholders' value during this period.
- The Group is financially healthy. It has a Debt Equity ratio of 0.5. The interest coverage ratio based on the past 8 years' average EBIT is 3.1. From 2013 to 2020, the total Free Cash Flow to the Firm was about RM 550 million.
- The Group has a new management team and has implemented a Transition Plan to address the viability and sustainability of the business.
- Among the Bursa Malaysia plantation companies, the Group ranked No 6 in terms of total oil palm planted areas. The Group is in a commodity sector where productivity and cost control will have a significant difference in the profits. A comparison of BPlant FFB yield with these top 5 companies showed that there is room for improvement.
- BPlant is undergoing a turnaround. As such the Asset Value is a better estimate of the intrinsic value. There is a sufficient margin of safety as the current market price is about half of BPlant's NTA of RM 1.16 per share.
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Supporting details
Background
The Group is principally involved in the ownership and management of oil palm plantations. This covers the cultivation of oil palm and harvesting of its Fresh Fruit Bunches ("FFBs"). It includes the production and sale of Crude Palm Oil ("CPO") and Palm Kernel ("PK").
BPlant co-own or leases a total of 48 oil palm plantation estates and 10 palm oil mills in Malaysia.
- There are 19 plantation estates in Peninsular Malaysia, 20 in Sabah, and 9 in Sarawak.
- BPlant owns and operates 3 palm oil mills in Peninsular Malaysia, 5 in Sabah, and 2 in Sarawak.
The Group total landbank stands approximately at 98,200 Ha. Out of this total, the area under oil palm cultivation is around 79,400 Ha. It comprises 24,000 Ha in Peninsular Malaysia, 41,800 Ha in Sabah, and 13,600 Ha in Sarawak.
Among the listed plantation companies under Bursa Malaysia, the Group ranked No 6 in terms of the total acreage of oil palm planted areas.
The Group started as a public limited company in 1946 and over the past 70 odd years, it has seen several corporate changes. Apart from mergers, there were listings under the KL and Singapore Stock Exchanges. There were also de-listings from both exchanges, although at different times. Its present form was listed under Bursa Malaysia in 2014.
Current Performance
As of the end of March 2021, the Group achieved revenue of RM 172 million compared to RM 162 million for the same period last year. Profit after tax for Q1 2021 was RM 11.2 million compared to a loss of RM 12.3 million for Q1 2020.
Management has attributed the improved revenue and profits to the improved prices of palm products.
The quarterly results are in contrast to the past 8 years of performance as shown in the Performance Index chart.
Revenue and gross profitability have been below the levels relative to 2013.
Profit after tax had been volatile. Although cumulatively, the Group made profits over the past 8 years, the bulk of the profits were not from the operations.
- From 2013 to 2020, the Group achieved RM 1.1 billion of PAT.
- From 2013 to 2020, the gain from the disposal of land and securities amounted to RM 1.2 billion. The significant land sales (> RM 50 million gain) were carried out in 2013, 2015 to 2017, and 2019.
- The plantation operations incurred cumulative losses for the period.
- Note that the Group incurred RM 176 million of impairment in 2019.
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| Chart 2: Performance Index |
Was the challenge faced by BPlant an industry issue? To answer this, I compared BPlant performance relative to the industry. The industry in this context is all the companies under the Bursa Malaysia plantation sector except for 2 companies. Refer to Note 1.
You can see that while there has been some decline in revenue since 2013, the industry decline is less severe than those experienced by BPlant.
I would conclude that BPlant did not perform well from an operations perspective.
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| Chart 3: Revenue Index comparison |
Returns
Management's role is to generate returns irrespective of whether through operations or otherwise. Through such a lens I would not rate BPlant performance as good.
Over the past 8 years, there were only 3 times that BPlant outperformed the industry. This is looking at it from an ROE and well as a ROA basis. Recall that there were significant gains from land sales in 2013, 2015 to 2017, and 2019. Without these gains, the returns in these years would have been much lower.
These metrics confirmed the earlier conclusion that the Group performance is not good.
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| Chart 4: ROE comparison |
Shareholders’ value creation
Given the poor returns, it is not a surprise to find that shareholders’ value was not created since 2013.
I looked at the following metrics to judge shareholders' value creation. They compared the returns with the appropriate cost of funds. You can see that the actual returns were below the respective cost of funds for all the metrics.
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| Table 1: Shareholders' value creation |
Notes
a) Based on the average for each year from 2013 to 2020. Assumed tax rate of 24 %. This was compared with the WACC.
b) This looked at how the shareholders’ funds have grown from the end of 2013 to 2020 assuming that no dividend was paid. This was then compared against the cost of equity.
c) This looked at the total gain received by a shareholder who bought I,000 shares at the end of 2014 and held onto it till the end of 2020. This was then compared with the cost of equity. The total gain was computed as follows.
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| Table 2: Shareholders' gain |
Finally, from the Q Rating perspective, the results for BPlant placed it below the panel average.
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| Chart 5: Q Rating |
Sources and Uses of Funds
The Group has a Total Capital Employed (TCE) of RM 3.7 billion as of the end of March 2021. Of this, 70 % was funded by shareholders with most of the balance from debt. This is equal to a Debt Equity ratio of 0.47 compared to the industry average of 0.53 (for 2020). Refer to Note 1.
In 2020, the Group incurred about RM 60 million of finance costs. Based on the past 8 years’ average EBIT of RM 188 million, this is equal to a 3.1 interest coverage ratio. This is likely to be equivalent to a BB rating for a small company (based on Damodaran’s dataset).
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| Chart 6: Sources and Uses of Funds |
About 98 % of the TCE was used for the operations while the non-operating assets only accounted for the balance.
Based on the above, I concluded that BPlant is financially healthy.
Capital Allocation
During the period from 2013 to 2020, the Group generated RM 1.1 billion Cash from Operations. Note that the gain from the sale of land was captured under Cash used in Investments.
The Cash from Operations is a good sign of the cash-generating ability of the operations. Of these, RM 1.1 billion was spent on dividends. Considering that the total PAT generated during this period was about RM 1.1 billion, this is equal to a 100 % payout.
During this period, the Group spent about RM 550 on Property, Plant, and Equipment. Give the RM 1.1 billion Cash from Operations, the Free Cash Flow is about RM 550 million.
During the same period, the Group Cash flow from investing activities amounted to RM 1.2 billion. RM 600 million was incurred for the acquisition of plantations assets of the Boustead REIT in 2014.
Given these results, I would not rate BPlant capital allocation as good.
Management
The Board in 2020 comprises 11 Non-Executive Directors. Most of the Board members are new to the Group.
- There were 7 Independent Non-Executive Directors with an average age of 61. They have from 1 to 8 years of service as Board members with an average of 3 years.
- There were 4 Non-Independent Non-Executive Directors. They have an average age of 48 and have served an average of 1 year as Board members of BPlant.
6 senior management team members were featured in the 2020 Annual Report. The team also looked relatively new to BPlant with the CEO being appointed in Dec 2019.
- They have an average age of 52 years.
- Except for one who has been with BPlant for 18 years, the average tenure of the 5 others was slightly above 2 years.
I hope that the “fresh” Board and senior management team would look into improving the operations.
In its 2019 Annual Report, the Group mentioned that it embarked on a Transformation Programme in Oct 2019 to ensure the long-term viability and sustainability of the business.
“The Transformation Programme involved the comprehensive review of all the Group’s operations and resources and developing a plan of action that would spur growth, manage growth and create value for our shareholders”.
In its 2020 Annual Report, this has been described as Reinventing Boustead strategy.
The appointment of the new CEO (Ibrahim Abdul Majid) and the appointment of the senior management team of Boustead Holdings to the Board of BPlant is part of this plan.
Since the release of the 2020 Annual Report, there have been several changes to the Board and management.
- The CEO, Ibrahim Abdul Majid resigned in Jul 2021 after being in the post for about 1 1/2 years. A new CEO, Zainal Abidin was appointed on 12 Jul 2021.
- 2 Independent Non-Executive Directors have resigned.
- A new Independent Non-Executive Director was appointed in Jul 2021. This person became the chairman of the Audit Committee in Jul 2021.
The short tenure of the CEO is something unusual considering that he was brought in as part of the plan to reinvent the Group. One interpretation of the events is that the Group did not agree to the former CEO’s plans. A change in CEO will probably delay the turnaround.
The other unusual item is the Jul 2021 report by The Edge that Boustead Holdings Bhd is weighing options for the listed palm oil subsidiary. The options included selling the unit, leasing the plantation to third parties, or selling the individual plantations separately. The Edge subsequently reported that the plan is to dispose of the low-yielding assets in Sarawak first.
BPlant replied to the Edge article as follows:
“As a corporate entity that will always find ways to provide the best shareholder value, BPlant seeks prospects to unlocking the values of our assets including the estates in Sarawak. Nevertheless, the plan is still at the preliminary stage and BPlant has yet to engage with any interested parties.
With the recent announcement of Zainal Abidin Shariff as the new Chief Executive Officer of BPlant he shall take this opportunity to re-evaluate all existing plans, implementations and future initiatives so that they are consistent with the overall Reinventing Boustead Strategy.
Should there be any development on the said matter, BPlant will make the necessary announcement as guided by Bursa Malaysia’s Main Market Listing Requirements.”
I will leave it to you to judge whether there is any link between the change in the CEO and the Edge article.
To get a sense of what is possible in terms of improving the operations, I looked at the industry leaders. The table below shows the key production metric for the top 5 plantation companies compared to BPlant. As can be seen, BPlant yield in terms of tons of FFB per hectare is the lowest among the panel.
Of course, the yield also depends on the age of the plant and the location of the estates. But I cannot imagine the new team being happy with the current performance.
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| Table 3: Peer FFB Yields |
Valuation
I valued BPlant based on its Asset Value and Earnings Value. The chart and table sum up BPlant’s valuation.
- The Earning value is very much lower than the Asset Value. It indicates a situation of poor assets utilization. You should not be surprised given its poor earnings.
- Over the past 5 years, BPlant share price has been higher than the Earning Power Value. The market had ignored its poor earnings.
- At its current price of RM 0.58 (as of 30 July 2021), BPlant is even trading below its NTA value of RM 1.16 per share (as of 31 Mac 2021).
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| Chart 7: Valuation |
I used 2 valuation methods to derive the Earnings Value:
- The discounted Free Cash Flow method as per Damodaran.
- The discounted Residual Income method as per Penman.
I then took the average from both methods as the final computed intrinsic value. This applied to both the EPV and the Earning value with growth.
When it came to growth:
- I used the fundamental growth equation to derive growth for the Discounted Free Cash Flow method. This was Return X Reinvestment rate = growth.
- For the Residual Income method, I computed the growth trendline based on the historical residual income.
- In both cases, I capped the growth at 5%.
The results you see in the table are based on these computations.
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| Table 4: Valuation metrics |
In deriving the Earnings value, I have assumed that the past 8 years’ average performance represented the future. This meant that:
- If you believe that the future is better, then its Earnings Power value will be higher than RM 0.10 per share.
- However, if you think that it will be worst, then the RM 0.10 per share is over-estimated.
The Earning Power value assumed zero growth. With the growth component, the value increased to RM 0.28 per share.
BPlant is undergoing a turnaround. Given this, a valuation based on assuming that the future is going to be the same as the past is not realistic. You would expect the future to be better.
As such while mathematically correct, the computed Earnings Value is not reflective of the intrinsic value of the Group. I would rely on the Asset Value.
Value of Plantation assets
If we are going to rely on the Asset Value, can we assess whether this reflects the market value?
Based on its RM 4.1 billion of Total Assets and 79,400 Ha of planted land, the value of BPlant land came to about RM 52,000 per Ha or RM 21,000 per acre.
Contrast this with the following extracted from the 2 April 2019 Star article:
- United Plantations Bhd acquired the estates in Teluk Intan, Perak from Pinehill Pacific Bhd for RM414 million. This is equal to RM 120,336 per planted Ha.
- Boustead Plantations Bhd disposed of 138.9 Ha of land in Penang to SP Setia Bhd, which fetched an even higher valuation of RM 979,508 per Ha.
- Early this year, Huat Lai Group offered to buy United Malacca Bhd’s four oil palm estates in Negri Sembilan and Melaka for RM 17 5million cash. This is equal to about RM 171,533 per Ha.
A search for the sale of plantation land under Malaysialand.com showed prices ranging from RM 4,300 to RM 130,00 per acre. The average of the 49 listings was RM 31,500 per acre.
In Jun 2021, IJM Corp Bhd agreed to sell its entire 56.2% stake in subsidiary IJM Plantation to Kuala Lumpur Kepong Bhd for RM 1.53 billion cash. This came to RM 3.10 per share.
- MIDF Amanah Investment Bank said that the offer is above the firm’s valuation of RM 2.62 per share. This is based on its financial year 2022 price-to-earnings ratio valuation of 16 times.
- Kenanga Research’s opined that the RM 3.10 per share and 10 sen dividend per share translated into an enterprise value of RM 54,000 per Ha. This is in line with market prices. The implied FY22 PE ratio and PBV of the offer are 23.6 times and 1.9 times. This is at a premium of 41% and 101% to Hap Seng Plantations Holdings Bhd and is deemed to be highly attractive. Hap Seng is IJM Plantations’ closest upstream peer with an enterprise value of RM 39,000 per planted Ha.
Based on this back-of-envelope survey, I concluded that BPlant's Asset Value is unlikely to be impaired.
Pulling it all together
I would conclude that BPlant performance is poor. The Group returns are below the cost of funds. Looking at the performance of the top 5 plantation companies, one possible reason for the poor results is the low FFB yield. This suggests that there is potential to improve the results.
A successful turnaround would lead to a better Earnings Value compared to the computed historical one. A successful turnaround would also lead to growth in the Asset Value.
The analysis suggests that the Asset Value represents the minimum intrinsic value. The current price is significantly below this intrinsic value thus providing a sufficient margin of safety.
The news on the possible sale of BPlant could be a catalyst for a re-rating. The other catalyst is the turnaround of the business. The only worrying item for any turnaround is the change in the CEO.
Looking at the margin of safety, I concluded that BPlant is one of the better Bursa Malaysia stocks to invest in.
Notes
1) There are 43 companies under the Plantation sector in Bursa Malaysia in 2021. However, the data from 2010 to 2020 were not available for all of them.
- Boustead and Matang were listed in 2013 while Sime Darby was listed in 2015.
- Batu Kawan started to consolidate the results of KLK from 2014. The financials prior to this did not match that post-consolidation.
Because of these reasons, I computed the base rates from 2013 to 2020. This meant leaving out Sime Darby. At the same time, I excluded KLK because its results were accounted for under Batu Kawan.
The final sample thus comprised 41 companies.
For details on the Debt-Equity ratio, and other metrics, refer to the plantation sector base rates presented in "How the Malaysian plantation sector performed over the past 8 years"
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I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.
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