Investment Highlights

• We are upgrading Genting Plantations (GenP) from SELL to HOLD as its share price has fallen below our fair value of RM10.84/share. Our fair value for GenP implies a fully diluted FY18F PE of 25x.

• GenP has proposed to acquire Knowledge One Investment Pte Ltd (KOI) from Lee Rubber for US$94.97mil. KOI has an 85% shareholding in a subsidiary, which has the HGU (Hak Guna Usaha) land title for 14,661ha of oil palm land in South Kalimantan. Out of the 14,661ha, about 12,893ha are already planted. The landbank also comes with an palm oil mill of 60 tonnes per hour.

• Out of the 12,893ha, roughly 90% or 11,555ha comprise oil palm trees, which are more than four years old. The estate's FFB grew by 25% to 95,181 tonnes of FFB in 2016. KOI's net profit was US$1.7mil (RM7.0mil) in FY16.

• The positive points:

• The oil palm estate in South Kalimantan is young as about 90% of the trees are just slightly older than four years old. Currently, average ages of GenP's oil palm trees are 5 years in Indonesia and 16 years in Malaysia. On the group level, average age of GenP's oil palm trees is 10 years old.

• Second, the acquisition will increase GenP's planted landbank in Indonesia from 71,940ha (as at end-FY16) to 84,833ha. Also, GenP does not have to worry over land title issues as the oil palm estate in South Kalimantan already has HGU. It is difficult to acquire landbank with the HGU land title in Indonesia nowadays. Most of the time, the landbank only comes with the Izin Lokasi licence. GenP said that the landbank is located close to GenP's existing plantations in central Kalimantan.

• Other points:

• We believe that the acquisition price of about US$15,196/ha (RM65,341/ha) for 85% shareholding of the landbank, is on the high side as it is slightly above the estimated market value of planted landbank in Indonesia of about US$10,000/ha. Our calculation excludes the value of the palm oil mill of 60 tonnes per hour.

• GenP has to assume borrowings of US$71.6mil pursuant to the proposed acquisition. This is in addition to the debt that the group has to raise to finance the acquisition cost of US$94.97mil. Assuming the acquisition is entirely financed by debt, we estimate that the borrowings would increase GenP's net gearing from 22.3% to 36.7% in FY17F. Interest expense may increase by more than 40% in FY18F.

• We do not expect earnings contribution from the new oil palm estate to be significant. Although it would increase GenP's FFB production by 6%, this would be offset by higher interest expense from the rise in borrowings.

Source: AmInvest Research - 21 Aug 2017