Analysts bullish about Malaysia palm oil merger

29 November 2006 08:51  [Source: ICIS news]

By Jeanne Lim

SINGAPORE (ICIS news)--Malaysia’s ringgit (M$) 31bn ($8.5bn) plan to create a global oil palm behemoth will bring about economies of scale and operational efficiencies when eight state-owned listed companies are finally merged as one, analysts said on Wednesday.

Malaysia’s largest investment bank, CIMB Investment Bank (CIMB) on Monday proposed creating the world’s largest listed oil palm plantation through Synergy Drive, a special-purpose vehicle to merge the businesses of eight companies.

The eight companies, which include three of Malaysia’s largest plantation-based conglomerates, Sime Darby, Kumpulan Guthrie and Golden Hope Plantations, are controlled by Malaysia’s state investment agency Permodalan Nasional (PNB).

"The merger would bring new directions to the GLCs (government-linked companies) by having a new management team and injecting new blood in the company," a Malaysia-based analyst with AmSecurities said over the phone.

The analyst, who declined to be named, added: "Because the deal’s so big, this new company will have economies of scale, and duplicated costs such as headquarter expenses will be cut out."

Operationally, the merger makes sense because the new company can now make "go to the nearest mill" to get its supplies, which is not the case now, he said.

Keith Wee, analyst with Hong Leong Group (HLG) Research, said that Guthrie and Golden Hope alone could save up to 20%, or M$160m of their combined general and administrations costs, which are estimated at M$800m.

The M$160m is about half of Guthrie’s fiscal 2005 net profits, he pointed out.

The merged entity could also save on purchasing fertilizer, for instance, he said. Wee, however, was not able to quantify these savings.

He also noted that "the merged entity will be the largest listed palm oil in the world in terms of plantation estate, and its production output will be the largest in the world."

It is expected to have potential total annual revenue of over M$26bn, a combined workforce of over 107,000 with total plantation land of approximately 600,000 hectares (6m km2) located in Malaysia and Indonesia.

Crude palm oil (CPO) output is expected be about 5-6% of global CPO production.

The boards of the companies will decide on the merger’s fate on 27 December.

($1 = M$3.63)

By: Jeanne Lim
+65 6780 4359

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