IJM Plantations Berhad is chiefly affianced in the cultivation of oil palm and palm oil milling activities. Over the next few years, The Group intends to focus on expediting the expansion programme in Indonesia in order to capitalize on the increasing demand for oil palm. In my opinion, this would positively and significantly enhance the overall performance, position and cash flow of the company in the long run. However, it is also predicted that IJM Plantations Berhad may have to raise funds for the expansion of estates in Indonesia. This may not pose a huge threat to the company due to it striving nature as well as history of solid capital base and tough operating cash flows. Generally, the company's focus on land bank expansion is supported by the increasing consumption of palm oil in developing countries and current flattish CPO prices. Also, the outlook on CPO prices is trending upwards in the near future. Hence, the long-term prospect of IJM Plantations Berhad remains positive in the industry. However, there are risks that may affect the company's performance such as unpredictable weather conditions, disease outbreak and risk of foreign and currency exchange due to expansion in Indonesia. Generally, it is expected that this company prevail. This is justifiable by the company's striving nature, up-trending CPO prices outlook and the land-bank expansion in Indonesia. Hence, I rate this stock a buy for potential investors and a hold for existing investors.
Chapter 2: Selected Company Information's'
Company Background
2.1.1 An Introduction to IJM Plantations Berhad
IJM Plantations Berhad is a "boutique" palm oil agribusiness that began in 1985. This well established company is based in Sabah, Malaysia. The name IJM is derived from the name of three different companies. "I" stands for IGB Construction Sdn Bhd, "J" stands for Jurutama Sdn Bhd, and "M" stands for Mudajaya Construction Sdn Bhd (IJM Corp. Berhad., 2005). These three companies were merged to form IJM.
The group has embraced the theme Nurturing Sustainability that involves four main pillars of strategy. The four pillars are productivity and innovation, followed by care for environment, returning to community and last but not least investor in people.
The principal activities of IJMP are cultivation of oil palm, investment holding and provision of management services. The core businesses of the subsidiaries are cultivation of oil palm, investment holding, provision of agricultural management services to plantations, logistics, port and jetty operations, warehousing and shipping. IJMP is a 100% owned subsidiary of IJM Corporation Bhd. As of 2010, the total plantation area has increased to 24,401 hectares in 2010/11 (IJM Annual Report, 2011).
2.1.2 IJM Plantations Berhad Vision, Mission and Objectives
IJM Plantations falls under the industry of Malaysian Plantations. The vision of this company is to be a leading regional plantation group (IJM Corp. Berhad., 2012). The mission of this highly established company is to uphold the highest standards of performance in plantations and agri-businesses (IJM Corp. Berhad., 2012).
According to IJM Corp. Berhad (2012), the objectives of the company are as follows:
To uphold the highest standards of professionalism and exemplary corporate governance to maximize the benefits for all stakeholders
To respect the different cultures, gender, religion, human rights and dignity of our stakeholders
To ensure the standard of our agricultural and milling practices is of quality that matches or exceeds others in the industry
To create a conducive environment for team spirit among our employees to work towards a unified workforce
To be a responsible and respected corporate citizen with concerns for social, safety, health and environmental issues.
2.1.3 Factors That Contributed to the Choosing of IJM Plantations BHD as Object of Study
Malaysia currently accounts for 39 % of world palm oil production and 44% of world exports (Foreign Agricultural Service, 2012). Malaysia is one of the biggest producers and exporters of palm oil and palm oil products in the world. Hence, our country has an important role to play in fulfilling the growing global need for oils and fats sustainably (MPOC, 2012). Being as such, I was interested in choosing a company from the oil palm plantation industry for the present research.
Thus, I began my research on several leading oil palm plantation companies in Malaysia. Overall, I was immensely interested in IJM Plantations Berhad because it is a highly established company. Moreover, IJM Plantations Berhad is a competitive company with great vision and also highly caring towards the environment. One of the most important factors that made this company stand out was its objective to care for the environment and returning to community. This is what sets apart IJM Plantations Berhad form other plantation companies in Malaysia.
Other factors that attracted me to this company include the success story and striving nature of IJM Berhad. For example, the humble beginnings of this company were a mere 4000 hectares and has burgeoned 7 folds over the years. IJM Plantations Berhad is also a company that recognizes its employees as key assets in its business and is constantly inventing to improve their skills and competencies to further enhance performance excellence (IJM Corp. Berhad., 2005). Apart from that, IJM is a company that has stuck to its promise and word to continue to apply sound agronomic principles and best practices throughout its total value chain to protect the environment and ensure sustainable agribusiness (IJM Corp. Berhad., 2005).
IJM Plantation Management Methodology
2.2.1 IJM Plantations Berhad Corporate Governance
As for IJM Plantations Berhad, The Board of Directors is responsible for the performance and affairs of IJM Corporation Berhad, which includes the practice of high-level governance (Malaysian Corporate Governance Index, 2011). All Board members are expected to show good stewardship and act in a professional manner, as well as maintain the core values of integrity and enterprise with due regard to their fiduciary duties and responsibilities (IJM Corp. Berhad., 2011).
2.2.2 The Board Charter
As of 25 May 2012, IJM Plantations Berhad adopted the Board Charter. The Board Charter's purpose is to set out the role, functions, composition, operation and processes of the Board. Also, according to IJM Corp. Berhad (2012), The Board Charter ensures that all Board members acting on behalf of the Company are aware on their duties and responsibilities as Board members. Hence, This Board Charter would act as a source reference and primary induction literature to provide insights to prospective Board members and senior management. Additionally, it will assist the Board in the assessment of its own performance and of its individual Directors (IJM Corp. Berhad., 2012).
2.2.3 The Composition of the Board
Based on the Corporate Governance Statement released by IJM Corp. Berhad (2011), IJM Plantations Berhad is composed of a total of 8 Board Members. Of the 8 board members, 6 are Non-Executive Directors and among the Non-Executive Directors, 4 are independent (IJM Corp. Berhad, 2012).
The following table shows the member of the Boards of Directors of IJM Plantations Berhad and their respective shareholdings as of March 2012:
Table 1: List of IJM Plantation Berhad Board Members as of March 2012.
Board Members
Designation
% of Share
Tan Sri Dato' Wong See Wah
Independent Non-Executive Directors (Chairman)
-
Mr Joseph Tek Choon Yee
Executive Directors
-
Mr Purushothaman a/l Kumaran
Executive Directors
0.58
Mr Khoo Khee Ming
Independent Non-Executive Directors
0.02
Datuk Oh Chong Peng
Independent Non-Executive Directors
0.01
Mr M. Ramachandran a/l V.D. Nair
Independent Non-Executive Directors
0.01
Tan Sri Dato' Tan Boon Seng @ Krishnan
Non-Executive Directors
0.13
Dato' Teh Kean Ming
Non-Executive Directors
-
Source: Company Data & Bloomberg
2.2.4 A Review on the Balance between Independent Non-Executive, Non-Executive and Executive Directors
Based on the Corporate Governance Statement of IJM Plantations Berhad (2011), it is clear that there is a significant balance between Independent Non-Executive, Non-Executive and Executive Directors. This balance, together with the support from Management, guarantees the effective and fair representation of all shareholders. It also ensures that issues of strategy, performance and resources are fully addressed and investigated to take into account long-term interest of shareholders, relevant stakeholders and the community in which the Group conducts its business (IJM Corp. Berhad., 2012). According to IJM Corp. Berhad (2012), the composition and size of the Board are reviewed from time to time to ensure its appropriateness. As of March 2012, IJM Plantations Berhad is in line with the code hence leading to the achievement of the Malaysian Corporate Governance Index - Industry Excellence Award in 2011.
The IJM Plantation Berhad Board holds at least four regular scheduled meetings annually to which all Board members (Directors) have to attend. Additional meetings for particular matters convened as and when deemed necessary. Also, The Board has established several important committees to assist in the execution of the Board's responsibilities for the Group such as Audit, Nomination and Remuneration. As part of the management methodology of IJM Plantations Berhad, it is compulsory for all Directors to attend the Directors' Mandatory Accreditation Programme organized by Bursa Malaysia Securities Berhad ("Bursa Securities").
2.2.5 Conclusion of the Corporate Governance of IJM Plantations Berhad
Overall, principles of good corporate governance were upheld, as the Group believes that they are the platform for sustainable enhancement and protection of stakeholder value. Also, The Board is committed to ensuring that the highest standards of corporate governance, as embodied in the Code, are practiced throughout IJM Plantations Berhad and its subsidiaries.
Management Decisions & Impacts on Corporate Performance
2.3.1 Key Decisions, Announcements and Events
IJM Plantation is aiming to grow its land bank to 70,000hectares in both Indonesia and Sabah in 2013 (BURSA, 2012). Apart from that, based on the Chairman Statement (2012), the Group intends to establish approximately 40k hectares of palm oil farm in Indonesia over the next few years. This will have direct impact towards the overall performance and cash flow of the company. Hence it is suggested that this decision may increase company revenue and production in upcoming years.
Based on the Chairman's Statement (2011), on December 2011, the Company entered into a Sale and Purchase Agreement with its joint venture partner, CTI Biofuels LLC (IJM Corp. Berhad., 2011). This agreement benefits the company as it encourages the emphasis on trade and investment issues as well as builds trust and confidence amongst the partners.
Also, in March 2011, the Company disposed of its entire 50% equity interest in Loongsyn Sdn Bhd, for a total cash consideration of RM8, 447,000. This was the company's strategy to strengthen the competitive advantage in the industry and market competitiveness.
On the downside, some natural events had negative effects on the performance, position and cash flow of the company. For example, the El Nino and La Nina which caused drought followed by floods lead to a drop in yield. This in turn caused higher rehabilitation and maintenance costs (IJM Corp. Berhad., 2011). Poor production coupled with stronger exports from festive season demand is likely to lead inventory levels lower. This in turn is brought CPO prices higher (Allience Research, 2012).
Some of the awards achieved by IJM Plantations Berhad include Malaysian Corporate Governance Index - Industry Excellence Award, ACCA Malaysia Sustainability Reporting Awards (MaSRA), Prime Minister's CSR Awards (Environment Category), and Gold Medal from the National Council of Occupational Safety and Health. These are just a few of the many awards won by IJM Plantations Berhad that have direct positive effect towards the overall position and outlook as well as good standings in the eye of existing and prospective investors.
Summary of Prevailing Trends
2.4.1 Growth Rate
The Group experienced higher revenue from early 2005 to early 2006 due to higher sales volume and CPO prices. However, the current contribution to the Group's revenue and profit is not significant (Allience Research, 2012)
Overall, fresh fruit bunch production for the Group increased considerably despite unpredictable weather conditions from 2006-2010. In fact, the production almost doubled to more than 600k tones in FY2009 as compared to 300k ones in FY2006. Also, the fresh fruit bunch yield has improved steadily from 23.17 tonnes to 27.66 tonnes from 2006 to 2009. However, production decreased over the next two years (2010-2012), and production remains low as of March 2012. Hence, due to lower FFB production, revenue dropped 14.6%.
Generally, IJM Plantation Berhad's palm oil mills have performed reasonably but not excellent. This is because it has an OER (oil extraction rate) for CPO, which is similar to Sabah and Sarawak's average OER and outperforms the total industry in Malaysia (JF Apex Securities, 2011). However, over the past five years, IJM Plantations Berhad has faintly struggled in the OER for CPKO and kernel extraction rate as the rates remain slightly below the industry average.
Overall, revenue from 2006 to 2011 reduced by 8.0% due to lower sales volume of both CPO and PKO (IJM. Corp. Berhad., 2012). FFB production also decreased over the past five years as it moved out of the high crop season (IJM annual Report, 2011). Also, overall the growth rate of IJM Plantations Berhad did not experience any unusual nature that affected assets, liabilities, equity, net income, or cash flows in the past five years.
2.4.2 Financial Highlights
Over the past few years, the financial position of IJM Plantations Berhad has slightly weakened due to substantial dividend payout. Also, the aggressive expansion of projects, especially in Indonesia also contributed to this factor. In the past five years, he cash used for investing activities doubled to RM67.66mn. However, it is predicted that the company has to increase its borrowings to fund the development cost in Indonesia. However, the financial position of the Group is predicted to prevail due to the Group's sizeable capital base and strong cash flows (JF Apex SDN BHD, 2012).
2.4.3 Opportunity, Concerns and Risks
IJM Plantations Berhad will focus on expediting the expansion programme in Indonesia in order To capitalize on the increasing demand for oil palm. Also, the Group will maintain high standards of agronomy and industry practices. But young plantings here are not expected yet to make contributions to profitability in the current financial year.
One of the main concerns of IJM Plantations Berhad over the past five years was the rising cost of production. This however, did not have a major impact on the overall performance and cash flow of the company as remained vigilant in its focus in curbing and mitigating the rise, which was mainly attributable to the cost of fuel and fertilizers (IJM Annual Report, 2010). Cost effective initiatives were also actively pursued and implemented in critical areas to improve productivity and sustain yields (IJM Corp. Berhad, 2011).
Some of the risks faced by this company over the past five years include the competition from other competing oils such as Soybean and Sunflower. However, IJM Plantations Berhad as faced this by improving on productivity, exploring opportunities to diversify the income base, widening the end-use base for palm oil and exploring new marketing approaches (IJM Annual Report, 2010).
Over the past five years, unpredictable weather has remained one of the main risks for IJM Plantations Berhad. However, IJM has prevailed despite the weather-hurt yields.
2.4.4 Supply and Demand and Potential Change in Market
A potential change in market is predicted in the upcoming year; however, the change is predicted to be on the positive end despite the risks explained above. This is due to new maturities coming on-stream from Indonesia which will contribute significantly to overall performance of the company (IJM Corp. Berhad., 2012). Also, IJM Plantations Berhad is looking forward on expanding its land bank over the coming years. Thus far, the supply-demand scenario has been balanced and has not experienced any significant imbalance. The Chairman of the company believes that the 7-8% growth in not significant and the supply-demand scenario is expected to be balance in the future. There are concerns however, as IJM Plantations Berhad is sensitive to CPO price movements, where every RM100/tonne change in CPO price would affect IJMP's earnings by 5%-7% per annum (Allience Research, 2012).
Chapter 3: Detailed Financial Analysis
All analysis is referred to Appendix 1 and Appendix 2.
3.1 Meeting Liquidity Needs
Current Ratio is a liquidity ratio that measures a firm's ability to pay its obligations over the short run without undue strain. The current ratio of IJM Plantation Berhad has decreased to 6.5 times in 2011 compared to 7.2 times in 2010. However, the firm is still considered to have good short-term financial standing because the current assets of the company are twice more than the current liabilities. MHC Plantations Berhad has a similar decreasing current ratio at 0.7 times in 2011 compared to 1.0 times in 2010 which is a weak current ratio due to the higher amount of current liabilities than current assets and leave them in a tight current liquid position.
Quick ratio, also known as the acid-test ratio measures the ability of a company to use its quick assets to pay its current liabilities. IJM Plantation Berhad's quick ratio shows a decrease to 5.1 times in 2011 compared to 5.7 times in 2010 which may be a sign that the company is struggling to maintain or grow sales or maybe colleting its receivables slowly. The current ratio for the company is significantly higher than the quick ratio, which may indicate that the company's current assets are dependent on inventory. The same applies to MHC Plantations Berhad as their quick ratio in 2011 is 0.7 times compared to 1.0 times at 2010.
3.2 Meeting Operational Performance
The Creditor Days Ratio measure how long it takes a company to pay trade creditors. Generally a business should take as long as possible to pay its bill to maximize its cash flow. IJM Plantation Berhad's ratio decreased to 69.6 days in 2011 from 71 days in 2010 while for MHC Plantations Berhad has a increased to 190.3 days in 2011 from 68.2 days in 2010.
Debtor Days Ratio measures how long it takes the trade debtors to settle their bills. IJM Plantation Berhad ratio decreased to 22 days in 2011 from 27 days in 2010 and MHC Plantations Berhad ratios decreased to 60.3 days in 2011 from 64 days in 2010. Both companies indicate an improvement in debtor days by converting credit sales into cash slightly faster. The efficiency ratios for both companies are ideal since the debtor collection period is shorter than the creditor payment period.
3.3 Meeting Bond Holders Expectations
Gearing Ratio is a measure of financial leverage, signifying the level to which a company's activities are funded by the owner's equity to creditor's funds. IJM Plantation Berhad's gearing ratio increased from 0.003 % in 2010 to 0.018 % in 2011. However, for MHC Plantations Berhad gearing ratio decreased from 5.8 % in 2010 to 4.6 % in 2011. Both IJM Plantation Berhad and MHC Plantations Berhad show a conservative gearing ratio which is less than 35 % and they are less vulnerable to downturns in the business cycle due to funding of investment from the shareholders.
Debt to Equity Ratio is a measure of how much money the company should be able to borrow safely over long periods of time. IJM Plantation Berhad's ratio increased to 0.018 % in 2011 from 0.003 % in 2010 while for MHC Plantations Berhad has a decrease to 4.9 % in 2011 from 6.1 % in 2010. The ratios for both companies are low and they remain conservative by not taking advantage of the increasing income that financial leverage may bring.
3.4 Meeting Board Expectations
Net Profit Margin Ratio measures how much net revenue a company makes with the total sales achieved. The margin ratios for IJM Plantation Berhad increased to 29.1 % in 2011 compared to 19.6 % in 2010. MHC Plantations Berhad also shows an increase in the margin to 94.2 % in 2011 compared to 90.7 % in 2010. The increases in the margins indicate that both companies are efficient at converting sales to actual profit.
Gross Profit Margin Ratio is used to asses a Company's manufacturing and distribution efficiency during the production process. The gross profit margin ratios for IJM Plantation Berhad increased to 53.8 % in 2011 compared to 47.4 % in 2010. MHC Plantations Berhad also shows an increase in the margin to 67.8 % in 2011 compared to 63.6 % in 2010. Both the companies make reasonable profit with the increase of gross profit margin.
3.5 Meeting Shareholder Expectation
The Earnings per Share (EPS) Ratio indicates the rate at which a company is growing in terms of earnings which the company stockholders are entitled to receive. Both companies IJM Plantation Berhad and MHC Plantations Berhad show an increase in share of EPS ratio where IJM Plantation Berhad EPS is RM 18.4 cents at 2011 and RM 11 cents at 2010 while MHC Plantations Berhad's EPS is RM 22.5 cents at 2011 and RM 17.5 cents at 2010. These increments show that the company stockholders would receive a higher dividend.
Return Of Equity (ROE) Ratio show the profitability of a company by measuring how much profit the company generates with the money invested by the shareholders. IJM Plantation Berhad's ROE have increased from 6.6 % in 2010 to 11.3 % in 2011 whereas MHC Plantations Berhad's ROE increased from 10 % in 2010 to 11.5 % in 2011. The rising of ROE shows that the companies are increasing its ability to generate profit with the money the shareholders have invested.
3.6 Conclusion
Based on the analyzed ratios, we can observe that IJM Plantation Berhad's performance for the year 2011 is much better than year 2010. As a conclusion, we can conclude that IJM Plantation Berhad 's overall working capital management for the year 201 is better compare to the year 2010 which means that the firm has grown "stronger".
Chapter 4: Limitations, Recommendations and Conclusion
4.1 Limitations of Study
The analysis method used in this study is a ratio analysis. There are some limitations in using this method. First, ratio analysis involves numbers and figures; hence, it does not address issues that play major role in financial performance of the company, for example; product quality, customer service and employee morale. By using the ratio analysis method, a large portion of the report concludes on past figures and achievements and not the future. Usually, data and information for ratio analysis is not easily available.
4.2 Recommendations for Existing and Prospective Investors
IJM Plantations Berhad is a well managed plantation company with FFB growth expected at 5-year CAGR of 9% (Allience research, 2012). It is currently one of the most efficient planters with FFB yield of 24.8 mt/ha (Apex research, 2011). Hence, based on the ratio analysis of present report, this company is highly recommended for future investors. Some of the evidence suggests that this company is unlikely to see the lows and is trended upwards. Also, the demand for CPO is expected to grow over the next decade, and banking on the reaping benefits of the Indonesian growing estates, the future of IJM Plantations Berhad looks good. IJM Plantation's operating cash flow is strong historically, a trend that is expected to continue in upcoming years (Apex Research, 2011). Along with a strong balance sheet (net cash position of RM203m as at end-FY11), IJM Plantation should have little funding issue for its progressing oil palm tree plantings in Indonesia (Allience Research, 2012).
4.3 Conclusion
As of 2010-2011, IJM Plantations Berhad has a total of 13,000 hectares of plantation area in Indonesia (BURSA, 2012). In the near future, this total area of plantation is expected to increase further. According to BURSA (2012), the Indonesian plantation is expected to boost revenue significantly by the year 2014. In my opinion, the FBB growth will resume to increase in the near future as the Indonesian estates expand. Also, the flat CPO price outlook over the past 5 years to present is expected to keep this company on the upside. The estate expansion in Indonesia may coast IJM Plantation cash outflow, however, the striving nature of this company as well as its strong financial status and solid capital base will positively affect the net cash flow. This company is heading for positive long-term growth based on a more favorable regulatory environment and with improving infrastructures to boost the competitiveness in the industry. Also, IJM Plantations is focusing on diversifying the uses of CPO in order to boost domestic and global consumptions. Due to the above reasons, I would recommend potential investors to buy the stocks and existing investors to hold their stocks.
