Delloyd’s thrust into plantations, bus assembly pays off
KUALA LUMPUR: Automotive components manufacturer Delloyd Ventures Bhd’s decision to venture into plantations and later the assembling of buses in Indonesia was an unusual strategy to diversify its revenue and earnings base.
However, these diversification ventures appear to be paying off. Delloyd has successfully expanded its earnings and revenue base, and buffered the cyclical nature of the automotive industry and its reliance on national carmaker Proton.
Investors were initially sceptical when the company acquired Sungai Rambai Estate just over a decade ago in 1999, since it had no prior experience managing an oil palm plantation.
At that time, the country was still reeling from effects of the 1997-98 Asian financial crisis.
The crisis claimed many casualties, including automotive parts producers that were specially set up to support the growth of Proton since the early 1980s.
The Asian financial crisis had an adverse impact on overall car sales and Proton’s finances. Compounded with further liberalisation of the automotive market, Proton’s previously dominant lion share shrank over the years, reducing sales and margins for its parts suppliers.
For them, the days of depending solely on Proton for a living were coming to an end.
CASE FOR DIVERSIFICATION... Delloyd Ventures Bhd group MD Datuk Tee Boon Kee says the auto component maker’s main challenge is competition from abroad. Thus he sees the need for the company to continue to look for opportunities to expand. Already, its diversification into plantations and bus assembly has paid dividends.
This was when many industry players decided to restrategise and expand their earnings base, either by expanding their customer base to other carmarkers, or by diversifying into other industries, even into semiconductors in one case. The results were often mixed.
Delloyd is one of the better success stories. Its diversification into plantations and bus manufacturing is paying dividends, and is expected to grow further in the coming years.
Group managing director Datuk Tee Boon Kee said in an interview with The Edge Financial Daily that Delloyd was targeting to double the revenue from its plantation segment in three years due to higher fresh fruit bunches (FFB) production from its Indonesian estates.
He said the FFB yields soared from three tonnes per ha in 2006 to 12.96 tonnes per ha in 2009.
“With the revised FFB output, Delloyd anticipates yield to rise further to 13.75 tonnes per ha in 2010. By 2014, Delloyd targets output to reach 194,000 tonnes.
“For Malaysian estates, Delloyd plans to replant an average of 100ha annually over the next seven years and complete replanting of palm trees more than 25 years old by FY2021,” he said.
To recap, in 1999, Delloyd acquired its first plantation, the Sungai Rambai Estate in Kuala Selangor which covers 1,449ha, and has since also ventured into Indonesia.
Its Indonesian estates cover 14,422ha, which it acquired a 60% share in 2006 for RM42.9 million.
The Indonesian estates have a 30-year lease expiring in 2020 with an option to renew another 25 years and another 30 years.
The total planted area in Indonesia as at end of June 2010 was 11,157ha, of which 52% or 5,818ha are mature, ranging from six- to 11-year-old trees.
Tee said that as peak yields would be between 10 and 18 years, he expected the estates to continue to see rising yield in the near to medium term.
Delloyd targets the yield to increase from 12.96 tonnes per ha in 2009 to increase to 18.22 tonnes in 2014.
Based on the second quarter ended June 30, 2010, plantations accounted for a small but growing part of the group’s revenue.
Of the revenue of RM90.08 million, plantations accounted for RM11.47 million, automotive components RM68.27 million while the rest came from vehicle distribution.
However, the plantation sector’s performance was affected by lower output and yield due to heavy rainfall in Indonesia despite better FFB prices.
Indonesia bus venture zooms ahead Delloyd’s venture into Indonesia’s commercial vehicle assembly industry in 2008 is also paying dividends.
Through 51%-owned PT Asian Auto International (PT AAI ), it is involved in the assembly of high-floored articulated compressed natural gas (CNG) buses. Each bus is capable of accommodating 180 passengers and caters to the bus rapid transit system in Jakarta.
Tee said the subsidiary had delivered 17 CNG buses this year and would supply an additional 25 buses.
It is understood that PT AAI plans to tender for new orders to supply another 48 and 50 new buses by FY2011 and FY2012, respectively.
Tee said the expansion of transportation networks in Jakarta and major cities in Indonesia provided opportunities for Delloyd Ventures to supply more buses.
If all goes well, the group is also looking to expand its commercial bus and bus chassis manufacturing business in Indonesia to Malaysia by developing a prototype chassis for the Malaysian market.
Automotive continues to contribute bulk of earnings
As for the automotive parts and component manufacturing division, this had contributed between 75% and 80% of Delloyd’s total revenue and earnings over the last four years.
Delloyd’s main automotive products are door mirrors, cylinder key lock, door trims, bumpers, door latches and actuactors, which are produced in plants located in Klang, Tanjung Malim, Jakarta and Thailand.
The group’s main customers are Proton, Perodua and Toyota, as well as other foreign marques like General Motors and Honda.
“Currently, we are involved in the development of parts of the facelift models for Perodua and Proton,” he said, adding that the company is a Tier 1 supplier to the two companies.
Tee said Delloyd Ventures invested about RM2 million a year in research and development for the automotive industry.
“However, the main challenge ahead is the FTA (Free Trade Agreement), due to more competition from other countries and manufacturers in the automotive industry.
“Therefore, Delloyd is diversifying, looking for opportunities to expand, as there is a need to be more competitive,” he said.
Analysts positive on the stock
Delloyd’s strong earnings and decent valuations have also attracted the attention of the investment community.
For the six months to June 30, 2010, the company’s net profit grew 61.4% to RM18.38 million, from RM11.39 million a year earlier. This was achieved on the back of a 25.9% growth in revenue from RM135.48 million to RM170.54 million. The earnings in the first half of 2009 were adjusted to exclude the foreign exchange gains, the company said.
Earnings per share for the six-month period rose from 15.9 sen to 20.2 sen. At the current share price of RM3.15, this suggests the stock is trading at around eight times annualised earnings for 2010.
The stock is also trading 14% below its latest net assets per share of RM3.67. As at June 30, 2010, Delloyd had cash of RM65.34 million and RM84.78 million in borrowings. Its net debt of RM19.44 million translates into a minimal net gearing ratio of 5.8%, based on shareholders’ funds of RM333.27 million.
OSK Research maintains a buy call on Delloyd with a target price of RM3.90 based on 7.7 times FY2011 earnings per share. It said Delloyd’s valuation remained attractive, with its fair value at discount to the stock’s sum of parts valuation of RM4.23.
This article appeared in The Edge Financial Daily, October 7, 2010.
