• FELDA proposed to acquire 506,190,800 ordinary shares in FGV Holdings representing 13.88% equity interest for a total cash consideration of RM658.0m or RM1.30 per share.

• Upon acceptance and completion of the proposed acquisition, FELDA is obliged to extend a Mandatory Take-Over Offer (MO) to the remaining FGV shareholders at RM1.30.

• Pricing seems fair to FGV shareholders at RM1.30 as it is above our fair value of RM1.17 based on P/B of 0.9x and 3-years average BV/share of RM1.30.

Details of proposal

According to its announcement, FELDA has entered into conditional shares purchase agreement with 1) Kumpulan Wang Persaraan (KWAP) for the purchase of 222,480,700 FGV shares (representing 6.1% equity interest) for cash consideration of RM289.2m or RM1.30 per FGV share; and 2) Urusharta Jamaah Sdn Bhd (UJ) for the purchase of 283,710,100 FGV shares (representing 7.78% equity interest) for cash consideration of RM368.8m or RM1.30 per FGV share. Upon completion of the acquisition, FELDA’s equity interest in FGV will collectively be more than 50%, which requires it to extend a conditional MO for all the remaining FGV shares at RM1.30 per offer share. As of today, FELDA holds 21.24% equity interest in FGV, followed by Federal Land Development Authority holdings 12.42% and Koperasi Permodalan FELDA Bhd, 4.75%.

Rationale

The takeover is part of FELDA’s transformation plan to make it financially independent and sustainable, which involves, inter-alia 1) terminating the Land Lease Agreement with FGV; 2) taking over related palm oil mills; and 3) obtaining statutory control of FGV’s plantation land and integrated value-chain of FGV and subsidiaries. These measures will pave the way for greater cooperation in the business activities of FELDA and FGV Group, and provide FELDA access to high value-added downstream activities which is expected to contribute positively to the future earnings of FELDA.

Acquisition is at premium to our valuation

We believe the take-over offer price of RM1.30 is fair, as it represents 11.1% premium to our valuation of RM1.17 (based on P/B of 0.9x and FGV’s historical 3-years average BV/share of RM1.30). Conversely, based on FGV’s BV/share as at September 2020 of RM1.13, the offer price represents P/B ratio of 1.15x, significantly higher than its 3-years and 5- years average P/B of 0.97x and 1.03x respectively.

Recommendation

As the offer price is just slightly above yesterday’s closing price of RM1.27, there is little scope for price appreciation. We maintain hold on the stock.

Source: BIMB Securities Research - 9 Dec 2020