• The press reported that the major shareholders of Felda Global Ventures (FGV) is exploring the possibility of carving out the plantation business from the listed arm and placing it in a trust to be owned by shareholders.

• The plan is to distribute the units in the trust to all shareholders of FGV. FELDA, which is FGV's parent company, would be appointed as the manager of the plantation trust.

• Minority shareholders of FGV would be given shares in the trust and earn dividends.

• We believe that after carving out the plantations into the trust, FGV would be left with 55,297ha of landbank. FGV leases about 362,747ha of land from FELDA presently. We estimate that FGV sources a third of its FFB from the leased land, another third from FELDA and the balance from external parties.

• FGV's plantation division recorded estimated core pre-tax profits of RM105.6mil in 1QFY17 (excluding changes in land lease value) and RM294.1mil in FY16.

• Also, minority shareholders of FGV would own shares in two listed units of FELDA Group i.e FGV and the plantation trust. Net profit of FGV would drop as more than 80% of its plantation landbank would be sold to the trust. At the same time, it remains uncertain if the REIT or trust would be able to generate higher returns from the same parcels of plantation landbank, which are currently under FGV.

• In addition, it is unknown if the plantation REIT or trust would be able to match the dividend yields offered by the other listed REITs presently. Al-Hadharah Boustead REIT was privatised by Boustead Holdings in 2014 while most of the property REITs in Malaysia are expected to record dividend yields of more than 5% in FY18F.

• For shareholders' value to increase, the REIT or plantation trust's PE would have to be higher than FGV's current PE. FGV is presently trading at FY17F PE of 77.2x and FY18F PE of 59.8x. FGV's dividend yield is forecast at 1.4% for FY18F.

• Maintain SELL on FGV with a fair value of RM1.45/share, which is based on a P/BV of 0.9x.

Source: AmInvest Research - 16 Jun 2017