FGV Integrated Farming acquires MSM Perlis

• Subsidiaries of FGV Holdings Bhd (FGV), MSM and FGV Integrated Farming (FGVIF) have entered into a binding term sheet on the respective disposal and acquisition of 100 percent stake of MSM’s wholly-owned subsidiary, MSM Perlis Sdn Bhd for an initial disposal consideration of RM175m.

• We are positive on this deal as this would expedite FGV’s expansion on integrated farming business as the 11 parcels of agricultural and industrial land holds by MSM Perlis have been earmarked for the development of the FGV Chuping Agro Valley (FCAV) in Perlis by FGVIF.

• Maintain HOLD with unchanged earnings forecast and Target Price of RM1.30.

Details of proposal

Based on the announcement, FGV’s subsidiary, MSM is disposing 100 percent stake of its wholly-owned subsidiary, MSM Perlis to FGVIF for an initial consideration of RM175m, following the discontinuation of nonstrategic operations in MSM Perlis as part of MSM’s rationalisation strategies to streamline profitability and develop operational capability. The agreement is expected to be completed by the third quarter of 2021.

Rationale

We are of the view that the proposed acquisition is in-line with FGV’s longterm strategy to diversified its business away from monoculture business of oil palm. According to the announcement, the proposed acquisition will enable FGVIF to develop its integrated farming activities in the integrated high-value cash crop, which primarily focuses on large-scale pineapple farming and farming of other high-value cash crops as well as in the integrated dairy farm business and any suitable argi-business activities. Conversely, for MSM, this exercise is part of its rationalisation strategies to monetise non-core asset and to streamline profitability and develop operational capability.

Our view

We are positive on this deal as this would expedite FGV’s expansion on integrated farming business as the 11 parcels of agricultural and industrial land holds by MSM Perlis have been earmarked for the development of the FGV Chuping Agro Valley (FCAV) in Perlis by FGVIF. The Chuping area was designated as an agriculture development zone by the Northern Corridor Implementation Authority (NCIA) which allows the developer to benefit from the tax-free period of up to 15 years or more. According to the announcement, two major developments within FGV Chuping Agro Valley area by NCIA are 1) Chuping Valley Industrial Area (CVIA) – the 1,004ha to attract various new investors and business ventures, where the first phase of the project which measures 24ha out of the total area of 176ha started on June 2020, and 2) Perlis Inland Port (PIP) – covers an area of 202ha is developed within the CVIA, is positioning to tap the South Thai’s products volumes which are currently exported through Penang Port.

Financial effects. The proposed acquisition is not expected to have any material effects on earnings, EPS, and share capital of FGV and the substantial shareholders’ shareholdings in FGV for FYE21. According to the announcement, FGV Group’s gearing may be affected based on the financing decision, hence, expect the gearing of FGV Group will increase slightly to 0.72 from 0.70 based on FYE21 (assuming 80% funded by borrowing). Conversely, based on FYE20 figure, if we assume the proposed acquisition will be funded by FGV’s existing cash reserve, and bank borrowing - the cash consideration of RM175m is about 10% of FGV Group’s cash in hand as at endDec 2020. Assuming 80% of the acquisition is funded via borrowing, the groups’ gearing level is estimated to increase from 1.65 to 1.69 with cash and cash equivalent reduced from RM1.73bn to RM1.69bn with borrowing at RM8.91bn (including LLA liability).

Initial Acquisition price. Following to the announcement, the initial acquisition consideration of RM175m was derived after taking into consideration the Restructuring Exercise and the valuation report for FGV completed by Fadzilah and Fikri S/B at RM203.42m and the previous offer price for Ladang Chuping to F&N Bhd at RM156m. The initial acquisition consideration price comes to an approximate price per hectare of RM38,897/ha (Based on valuation report: RM45,214/ha; Previous offer to F&N: RM34,674/ha), which is 14% discount to the valuation report and 12% premium from previous offer price for Ladang Chuping measuring 4,453.9ha to F&N. Further to the announcement, the final price shall be determined by way of adjustment for net debt and net working capital of MSM Perlis as at the last day of the month of completion (refer as “Completion Net Debt and Completion Net Working Capital). Conversely, based on the announcement, the “Reference Final Disposal Consideration” is estimated at RM206.1m of which RM175m is the Initial Disposal Consideration while the balance of RM23.2m and RM7.8m is for the “reference net working capital” and “reference net debt” respectively.

Maintain forecast. We make no changes to our earnings forecast. Maintain HOLD with TP of RM1.30, based on P/B of 1.0x and historical 3-yrs average BV/share of RM1.30.

Source: BIMB Securities Research - 3 May 2021