• Genting Plantation’s (GENP) announced on Friday its intention to acquire 85% stake in oil palm firm in Kalimantan for a cash consideration of USD94.97m (RM407.99m).

• GENP will gains access to oil palm plantation land measuring 14,661ha and 60MT/hour mill that are within close proximity to the group’s other land bank in Central Kalimantan, hence presenting potential synergies and economies of scale.

• We are positive on this purchase proposal. The deal would expedite the group’s upstream expansion in Indonesia as c. 12,893ha had already been planted – raising its total planted area in Indonesia to 84,833ha from 71,940ha as at Dec 2016.

• Maintain our TP at RM11.22 with HOLD recommendation.

Details of the proposed acquisition

GENP’s 100% indirect subsidiary, AsianIndo had on 18 August 2017 entered into a conditional sale and purchase agreement with Singapore-based Lee Rubber Co Pte Ltd (Lee Rubber) for the proposed acquisition of 100% of the equity interest in Knowledge One Investment Pte Ltd (“KOI”) for a total cash consideration of USD94.97m (RM407.99m).

KOI holds 85% in PT Kharisma Inti Usaha (PT KIU) which in-turn has the rights to cultivate approximately 14,661ha of land in Kabupaten Tapin in Kalimantan Selatan into oil palm plantation. The balance 15% equity is owned by PT Kharisma Induk Mitra (12.5%) and Ong Keang Saang (2.5%). Upon completion of the proposed acquisition, GENP will have an effective equity interest of 85% in PT KIU. KOI’s PBT and net assets based on FYE 31 Dec 2016 were approximately USD1.7m and USD18.63m respectively. The proposed acquisition is expected to be completed in the fourth quarter of 2017.

Rationale.

According to the announcement, the proposed acquisition is in line with GENP’s long-term strategy to increase its interest in the palm oil upstream business. The rationale of the proposed acquisition is to 1) increase GENP group’s combined plantation land bank in Malaysia and Indonesia – by 14,661ha to 242,597ha; 2) expedite GENP group’s upstream expansion in Indonesia as some 12,893ha have already been planted – raising total planted area in Indonesia to 84,833ha (71,940ha previously); 3) Increase GENP Group’s ownership of oil mills in Indonesia to 4 units (3 units currently) with total milling capacity of 255MT/hour from 195MT/hour, and 4) contribute positively to the earnings as well as shareholders’ value of the company in the future.

Financial effect

The proposed acquisition is not expected to have any material effects on earnings, EPS and net assets of GENP’s in FY17. However, the proposed acquisition will increase the gearing of GENP by the quantum of external borrowings to finance the deal and the existing debt of PT KIU which would be consolidated at GENP upon completion of the proposed acquisition. Assuming 70%-80% of external borrowing, Group’s gearing is expected to increase from approximately RM2.46bn (as at Mar 2017) to RM3.0bn-RM3.1bn, hence increasing pro-forma net gearing to 0.32x from 0.20x as at 31 Mar 2017. Of note, GENP Group’s cash and cash equivalent as at 31 Mar 2017 stood at RM1.52bn.

Acquisition is fairly priced

We are positive on the proposed acquisition as the deal would expedite the Group’s upstream expansion. The acquisition will raise GENP total planted areas to 144,052ha from 131,159ha currently, hence presenting the Group with long-term earnings growth potential. Valuation of the deals comes to approximately USD6,478/ha, which we view as fair – when compared to the land cost in Kalimantan of USD1,000 to USD2,000/ha for greenfield and USD15,000/ha to USD 20,000/ha for brownfield – inclusive of 1) liabilities amounting c. USD71.56m to be assumed upon completion and 2) the 60MT/hour mill. Furthermore, 89.6% or 11,555ha of the proposed acquisition has planted area of more than 4 years old. The scarcity of sizeable land bank available in Indonesia and Malaysia is another crucial factor in our assessment of the proposed deal.

Maintain HOLD. We maintain our FY17 and FY18 earnings forecast pending 2Q17 result announcement on 23rd August 2017. Maintain HOLD with target price RM11.22 based on PER 26x (3-yrs average) over FY17 EPS.

Source: BIMB Securities Research - 21 Aug 2017