News

Boustead to undertake selective unit redemption from minority unitholders at RM1.90 as well as a special dividend of 20 sen (subject to adjustment) to all shareholders. Overall offer for minority will be fixed at RM2.10 (12.3% premium to last traded price).

Reasons: 1) REIT has difficulty in growing its size and maintain yield due to funding issue (as it distribute 90% of distributable earnings) as well as scarcity of and high prices of matured plantation while acquisition of immature plantation will drag yield; and 2) to merge and streamline all plantation assets under one entity as prelude to listing of the enlarged entity within 12 months.

Financial impact

Total outlay is RM611.1m which will increase its gearing as at Dec 12 from 1.23x to 1.38x. We believe this is still manageable as most debts are at operating companies (especially the heavy industry division as working capital for the Littoral Combat Ships contract from Ministry of Defence). Moreover, the subsequent listing of its plantation arm will help to reduce gearing.

On recurring earnings, it will dilute by circa 4% given the absence of dividend from the REIT and funding cost of 6% which more than offset elimination of minority.

Pros / Cons

In view of the US tapering talks and spike in bond yields, REIT has become a less attractive asset class (due to narrowing of spread).

Coupled with limitations on expanding the REIT’s asset base and eventual listing of the enlarged plantation arm, we believe the new entity will be in better position to expand landbank, especially into immature and/or brownfield ventures. Thus, despite our less sanguine view on the shortterm prospects of the plantation sector but positive view over the longer term, the enlarged entity may have higher appeal to investors and better unlock the group’s deep values.

Risks

Lower than expected revenue contributions from different divisions and/or margins falling short of expectations as well as relatively high gearing and potential dilution from cash call.

Forecasts

Unchanged.

Rating

BUY

Positives –

Still undervalued, P/E (low double-digit) and P/B not demanding, relatively high and quarterly net dividend yield, decent earnings growth and market yet to fully appreciate the hidden values.

Negatives –

Relatively high gearing and complicated group as well as quarterly fluctuation in earnings.

Valuation

Target price maintained at RM6.61 based on 10% holding company discount to estimated SOP of RM7.34.

Source: Hong Leong Investment Bank Research - 17 Jul 2013