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IJM Plantations eyes return to profit on anticipation of CPO price recovery

 

KUALA LUMPUR: IJM Plantations Bhd, which suffered losses in its last financial year as the palm oil industry was buffeted by what its managing director and chief executive officer Joseph Tek termed the “perfect storm”, is now banking on the recovery of crude palm oil (CPO) prices to return to profitability.

Experts at the recent IJM Plantations’ Palm Oil Outlook Seminar 2019/2020 — namely, leading vegetable oil analyst and editor of Oil World, Thomas Mielke, and CGS-CIMB Research head of agribusiness Ivy Ng — are of the view that CPO prices are expected to rise from the current levels to average higher by year-end through 2021, partly driven by the enforcement of higher biodiesel mandates in Malaysia and Indonesia.

But in the event that CPO prices do not recover as forecast, Tek, who spoke to The Edge Financial Daily last week at the group’s Desa Telisai estate near Sandakan, Sabah, said the group would have to further enhance its efficiency and production.

“If the prices do not recover and continue [at] this level or even get depressed further, like other companies, we will have to stretch ourselves, in that we have to extract as much crop and oil as we can, so our productivity in terms of crops and oil is as high as possible,” said Tek.

In such a scenario, cost-cutting cannot be avoided and the group will have to reexamine what types of spending are considered a priorities, he said.

The “perfect storm” Tek described came from the convergence of factors like the European Union’s delegated Act that phases out the use of palm oil in biofuels, the recent minimum wage hike, as well as dry weather conditions that have led to less-than-optimum operating requirements.

“There are many factors which are not within our control, such as CPO prices, palm kernel prices and foreign exchange (forex) movements.

“These two (palm product prices and forex movements) are the core to our profitability. We do have borrowings, and that will be subject to currency fluctuations and the commodity’s prices,” said Tek, adding it would be helpful if CPO prices recover above current levels in the second half of the year.

Last Friday, the benchmark palm oil contract for October delivery on Bursa Malaysia Derivatives rose 2.1% to settle at RM2,179 per tonne, its strongest daily gain in two months.

“I take the midterm view that prices should recover and remain resilient,” Tek said, adding CPO prices of around RM2,500 per tonne would be optimum for the group.

For the financial year ended March 31, 2019 (FY19), IJM Plantations fell into the red with a net loss of RM36.34 million, versus a net profit of RM27.86 million a year ago, as revenue declined 15.6% to RM630.90 million from RM747.22 million previously.

The group attributed its weaker revenue to lower commodity prices. This, combined with cost pressure at its Malaysian operations, and the young mature areas in Indonesia that require full plantation maintenance and overheads against just start-up yields, contributed to the group’ loss.

In addition, the group had to book in net forex losses that amounted to RM25.79 million on its US dollar and the yen-denominated borrowings.

As at end-March, the group had a total planted area of 60,633 ha, of which 36% or 21,881ha were classified as young mature, where crop ages range from four to seven years. Some 51% or 30,869ha were considered in their prime — which are aged between 8 and 20 years — and yield in excess of 20 metric tonnes per hectare a year. About 2% or 1,354ha of the group’s total planted area are considered mature, with oil palms in excess of 20 years of age. These areas, which experience declining yields, need to be replanted.

The group’s Indonesian operations make up 35,852ha of its total planted areas, while its Malaysian operations — centred in Sabah — contribute 24,781ha. Its Malaysian palms have a weighted age of 14 years, and seven years in Indonesia.

Tek said the group’s replanting activities in Sabah amount to between RM12,000 and RM15,000 per hectare and that the group would be “pragmatic and proactive” in its replanting.

On whether IJM Plantations is looking to acquire more plantation land, Tek said the group is not actively looking but would be open to the possibility if a property adjacent to one of its estates becomes available, so long as the potential acquisition “synergises” with the group’s existing operations.

For FY20, the group is expecting fresh fruit bunch production to exceed a million tonnes — it achieved 976,395 tonnes in FY19 — in anticipation of the recovery from El Niño effects in the group’s Malaysian operations, as more areas in its Indonesian operations move closer to the prime age of crop production.

“We are just four months into the financial year. We noted that the recovery in the Malaysian operations [is] on track, while production in the Indonesian operations continues to expand with the maturing of the trees towards prime age. We should be on track to achieve the target,” said Tek.

In terms of capital expenditure, the group is expecting to spend between RM120 million and RM140 million for FY20, with the lion’s share or about RM100 million going into expanding its Indonesian operations, with the remainder to be used for replanting and replacement of mill machineries and equipment in Malaysia. As for Indonesia, it will be spending to complete the construction of the group’s third palm oil mill there.

The government, Tek said, has to be more cohesive and holistic in its approach to tackling the problems that the palm oil industry faces. In other words, work together as a unit to resolve its outstanding issues.

In particular, he said, policies involving the sourcing of foreign labour need to be addressed — especially the levy structure involved in regularising this work force.

“It is not easy to get labour. Because bear in mind that our neighbouring competitor, Indonesia, would also need their own labour. Having said that, it is about making that policy more friendly when it comes to the recruitment, including when they go home and come back here, and about making sure that the levy structure is more fair or equitable, and that it appreciates the industry’s contribution [to the country],” Tek said.

In addition, Tek said the government should be flexible when taxing palm oil producers, and that there needs to be some sort of review of the tax structure when CPO prices are depressed.

“When the costs of production have escalated to a level of diminished or non-existent profit margins on the gross output, that [the tax structure] needs to be reviewed,” he explained.

While Tek acknowledged that the government has provided funding assistance for entrepreneurs to get Malaysian Sustainable Palm Oil or MSPO certification, he thinks more could be done, for example the provision of soft loans or matching grants to palm oil producers to implement new and green technologies, as well as to deal with the longer-term costs or the wear and tear involved in the use of such technologies.

Ultimately, stakeholder engagement and “getting the right people” who know the industry to participate in such engagements are important, Tek said, in order to help the industry move forward.