(Bloomberg) -- A blistering palm oil rally is stoking a flurry of plantation deals as growers brace for stiffer challenges from environmental and labor risks.
Higher prices of the tropical oil over the past year created a profit windfall for the industry, making the time ripe for cash-rich planters to snap up plantation assets. It’s also an opportunity to monetize estates for smaller-sized growers grappling with rising operational costs and worker shortages, as well as heightened scrutiny on environmental, social and governance issues.
Palm oil, used in everything from cooking oil to chocolate and detergent, is trading more than 40% above its five-year average amid a global rally in farm commodities, lower-than-expected production and optimism over demand. Still, while vaccination efforts are picking up in some parts of the world, several countries are battling fresh infections and renewed lockdowns, complicating matters for an industry so heavily reliant on manual labor.
“Sellers are bringing down prices to more reasonable levels because they see the challenges of labor shortages, forced labor allegations, and sustainability issues,” said Ivy Ng, head of research at CGS-CIMB in Kuala Lumpur. “Buyers are more confident of striking a deal because palm oil prices have been pretty good for the last nine months.”
Some companies are also looking to sell plantation assets to relieve debt burdens worsened by the Covid-19 pandemic, she said. “The high palm oil price means getting a better value. They have to sell those assets that are doing relatively well, and therefore plantations are the ones being transacted.”
Malaysian conglomerate Boustead Holdings Bhd. is weighing options for its listed palm oil subsidiary including a sale, Bloomberg reported Wednesday, citing people with knowledge of the matter. Boustead Plantations Bhd., which has a market value of about 1.4 billion ringgit ($336 million), may be sold, or see its plantations leased to third parties or sold separately.
The potential sale comes on the heels of Kuala Lumpur Kepong Bhd.’s takeover bid of IJM Plantations Bhd. for 1.5 billion ringgit last month.
More deals may materialize in coming months. Listed plantation companies with high net gearing and financial commitments may consider offers from growers looking to expand. Buyers -- especially palm giants with economies of scale to cope with higher ESG compliance costs -- will be scrutinizing the quality of estates, the age profile of trees and sustainable certification.
“What we can observe is a trend toward consolidation by bigger players, which could be partly driven by increasing ESG requirements, which is highly correlated to increasing cost of operations,” said Chua Zhu Lian, an investment director at Fortress Capital Asset Management Sdn.
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