PETALING JAYA (Feb 9, 2012): Pipe-coating specialist Wah Seong Corp Bhd's plan to start a huge oil palm plantation in Africa drew mixed response from the market, with some wary about the group taking on a big risk by venturing into a new business in an unpredictable region.
The stock fell four sen to close at RM2.06 yesterday.
Wah Seong last Friday said it will pay US$25 million (RM75 million) cash to acquire a 51% stake in Atama Resources Inc, which has obtained the rights to develop 470,000ha of oil palm plantation in Congo.
About 180,000ha were identified as suitable for oil palm cultivation and Wah Seong intends to develop the land in 10 phases over 15 years. To compare, IOI Corp Bhd's current plantation size is estimated at 229,000ha, while Kuala Lumpur Kepong Bhd owns 179,000ha.
Analysts said Wah Seong has never been directly involved in the palm oil business, although they noted that the company supplies boilers and other manufacturing equipment to millers.
AmResearch estimated the project will incur a capital expenditure of RM2 billion. "This amounts to two times Wah Seong's current shareholders' funds but could be partly offset by forest clearance such as sale of logs,'' the firm said.
AmResearch maintained a buy rating on Wah Seong, but lowered its fair value for the stock to RM2.45 from RM2.85 previously.
It was previously reported that Wah Seong had shelved a plan to de-merge the company, separating its oil and gas business into another entity. Currently, non-oil and gas business generates less than 10% of the group's revenue.
"We are positive on the move to build up the two core businesses so that they are large enough to stand alone. However, we expect the earnings impact to only be evident in the longer term,'' RHB Research said.
The firm kept its market perform call on Wah Seong with a target price of RM2.10.
Wah Seong indicated that it will start planting oil palm in Congo in the second quarter of 2013. The trees take between four and five years to mature and produce fresh fruit bunches.
In the meantime, Wah Seong will continue to rely on its core oil and gas business. As it is, about 90% of its income is generated by its pipe-coating business.
"The presence of leading plantation companies such as Sime Darby Bhd in Liberia, a country in West Africa, will effectively help to ease investors' worries on Wah Seong's decision for this venture,'' MIDF Research said.
In 2009, Sime Darby signed a 63-year concession agreement with Liberia for 220,000ha of plantation land. As of June last year, the conglomerate's planted area in Liberia stood at 7,800ha.
"We believe the main reason for choosing Congo is the opportunity to develop huge plantations at lower costs,'' MIDF said.
It estimated the cost to develop oil palm plantations in Congo at RM5,000 per ha against RM15,000 to RM20,000 per ha in Malaysia.