News

Boustead to acquire 2,409.8 ha of leasehold plantation land (two contiguous pieces – Tenegang-Koyah and Ulu Segama) in District of Lahad Datu, Sabah for RM184.6m cash.

Financial impact

Unable to ascertain impact on earnings given absence of information on age profile and yield.

Net gearing will increase from 1.45x as at Jun 13 to 1.49x, marginal given that its high gearing is mainly due to the borrowings at its heavy industry division arising from the need to fund the RM9bn LSC contract from MoD.

Pros / Cons

We are at beast neutral on the deal given that the new plantation land is only 3.5% of existing plantation division planted landbank.

Moreover, the acquisition price of RM76.6k/ha is relatively more expensive than FGV’s recent acquisition of Pontian United (which effectively value the latter’s plantation land in Sandakan at RM60.6k/ha ex cash). Again, caveat here is that the announcement did not provide details on age profile and yield which may skew this comparison.

We also believe that the new land is near to two of its largest plantation landbank (Sungai Segamaha Estate with 3,244.5 ha and Bukit Segamaha Estate with 2,415.1 ha) which could enhance economies of scale and partly mitigate the high purchase price. Moreover, production from the new landbank could be fed to one of its palm oil mill which is located within Sungai Segamaha Estate.

Risks

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

Forecasts

Unchanged.

Rating

BUY

Positives –

Still undervalued, privatization of Boustead REIT and subsequently list the plantation division could unlock vallues, 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 - 30 Sep 2013