Analysts have mixed views on Top Glove Corp Bhd's move to acquire greenfield rubber plantation in Indonesia.
On Monday, Top Glove announced that its wholly-owned sub-subsidiary, Best Advance Resources Ltd, would acquire 95% equity or 5,700 shares in PT Agro Pramata Sejahtera for RM22mil.
Agro Pratama holds a 60-year licence to operate a rubber forest plantation covering 30,000ha on two islands east of the southern Sumatra city of Palembang (around 20,000ha in Kabupaten Belitung and about 10,000ha in Kabupaten Bangka).
Top Glove said the proposed acquisition was expected to be completed within 15 months from the date of agreement or any later date as agreed by all parties.
Several research houses including Maybank Investment Bank Research and Affin Research view the acquisition positively.
“We are long-term positive on this latest development as it will reduce the volatility of its key input cost. Top Glove's operating environment remains conducive for now, amid declining latex prices and a strengthening US dollar,” Maybank Investment said.
Affin Research views the acquisition positively, as it is in line with Top Glove's aim of expanding upstream into the rubber plantation business.
“Previously, the company had focused on acquiring land in Cambodia, However, progress has been slow and there have been consistent delays in approvals. Consequently, we believe that management may abort its Cambodia plans, especially since it has been able to acquire land elsewhere.
“That said, the Indonesia land acquisition is a greenfield investment. Taking into account land acquisition (estimated at 15 months), planting and maturity requirements, we do not expect to see any earnings contribution within the next five to seven years,” Affin Research said.
CIMB Research has a contrarian view on this, saying Top Glove could be spending RM400mil, or RM50mil per annum over eight years, to clear land and fully cultivate the estate following its move to acquire Agro Pramata.
“We take a dim view of Top Glove's purchase of a 30,000ha greenfield rubber plantation in Indonesia's southern Sumatra, as the RM400mil that it may spend on developing it over the next eight years could be put to more efficient use to enhance manufacturing and brand equity,” CIMB Research said.
It added that hedging the variability of natural rubber prices, a financial instrument would be more prudent and less capital-intensive.
It said in the best-case scenario, the first planting could start by the second half of 2012, with first fruits by 2019 to 2020.
CIMB Research said the high capital expenditure was expected to be funded internally and the 30,000ha plantation could support a 12 billion-pieces-per-year glove-making facility.
“The acquisition is not a surprise as management has been talking about buying rubber plantation land for some time. Last quarter, it hinted that it may acquire land in Indonesia instead of Cambodia due to procedural difficulties there.
“We are negative on the acquisition as we believe that the capital allocated could be used to enhance Top Glove's manufacturing process and brand instead.
“Also, the rationale for diversifying upstream is to hedge the natural rubber price, which we believe is misguided. A less capital-intensive method would be to use the financial exchanges in Singapore and Japan,” CIMB Research said.
Source: www.thestar.com.my
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