IOI eyes oil palm estates, property acquisitions

Written by Benjamin Low and sourced from

KUALA LUMPUR (Dow Jones) -- Flush with cash after a recent rights offer raised RM1.16 billion, IOI Corporation Bhd, Malaysia's second largest palm oil producer by market capitalisation, is on the prowl for acquisition targets including Indonesian palm oil estates and land for property development.

"We have found opportunities to invest in our three core businesses of plantations, manufacturing and properties," executive director Lee Yeow Chor told Dow Jones Newswires in an interview.

IOI is among several major plantation companies in the region, including Singapore's Golden Agri Resources Ltd, that embarked on capital raising exercises in recent months in preparation to shop around for potentially beaten-down assets in the wake of the global recession.

The rights offer helped IOI increase its cash pile to RM4.2 billion as of the end of 2009, which means the company is well placed to start ticking off items on its shopping list.

High on that list are planted Indonesian palm oil estates, said Lee. The company is interested in buying planted estates because it already has plenty of greenfield land that's ripe for palm oil development following its venture into Indonesia in the last fiscal year.

In addition, IOI is also eyeing "small acquisitions of land for property development, both locally and in select developed markets overseas like Singapore," he said. The search for more land comes as the company prepares to officially launch its maiden property project at Singapore's Sentosa Cove in April.

Sentosa Cove is a 50:50 joint venture with Ho Bee Investment Ltd. A preview sale of limited units was held over the past weekend and the response has been encouraging, Lee said. "We sold more than 50% of the units released for sale and the (selling) price was above what we were looking at even before the (economic) crisis," Lee said, adding the project will have a sales value of S$1.1 billion.

Lee declined to elaborate on the expected timing of any acquisitions, adding that plans haven't been finalised.

He also signalled that the company is optimistic about the prospects for its mainstay palm oil business after adverse weather conditions last year resulted in challenging conditions for Malaysian plantation companies. Unusually wet weather in the earlier part of the year followed by the onset of dry conditions in the latter half wrought havoc on the productivity of the country's palm oil trees.

This meant that IOI was hit by a drop in oil palm fruit production in the first half of its financial year ended Dec 31, 2009. However, the company, which has a matured oil palm area of about 140,000 hectares, is confident that crop output will recover in its fiscal second half, with the improvement potentially strong enough to help the group claw back the earlier deficit.

"On a (financial) year-to-date basis, yields are down 6% from a year earlier, mainly because of the weather. However, we feel confident that there will be an improvement in the second half of the financial year," Lee told Dow Jones Newswires.

With the recovery, "we are hopeful that production this year will be the same as production last year because the effect of the weather is over," he said. Having endured a prolonged period of flat, if not lower, production, IOI expects growth to resume in its next financial year ending June 30, 2011 at a moderate pace of 3%-5%, Lee said.

He, however, cautioned the El Nino weather phenomenon, which can cause drought-like conditions, remains a threat that could yet put paid to hopes of a recovery in production. "Nevertheless, lower production will not have an effect on our financial performance in the current financial year because prices will more than compensate for it," he said, citing an average crude palm oil selling prices of RM2,400 per metric ton so far in 2010, up from the average of RM2,240 last year.

"We are pretty confident that the price will go higher. There is more upside," he said, declining to provide a detailed forecast. At the same time, production costs, which rose significantly in 2008 in tandem with a surge in fertilizer prices, have since eased, Lee said.

"The cost of production now is some 20% lower than in 2008," he said, adding that costs are expected to hold at around current levels. He declined to provide details on the actual cost.

In Indonesia, IOI aims to aggressively step up its plantation development programme, Lee said. The group owns a 67% stake in a joint venture for oil palm cultivation in Kalimantan. Since work started in the 2009 financial year, the joint venture has so far planted an area of 5,000 hectares. The pace of planting is expected to pick-up significantly in the coming years.

"Over the next 5 years, we aim to plant at a rate of 10,000 hectares per year, giving us a total planted landbank of 65,000 hectares in six years," he said. IOI's has set annual capital expenditure of RM250 million for plantation development, covering its landbank in both Malaysia and Indonesia.

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