Highlights

GenP announced that it has acquired the entire equity interest of SPC Biodiesel Sdn Bhd from Sterling Plantations Ltd for RM33m cash.

SPC Biodiesel owns a biodiesel plant in Lahad Datu, Sabah, with total annual production capacity of 100,000 tonnes. According to Sterling’s website, the biodiesel plant (which was supposed to commence operations in 2007) is idled.

This is GenP’s second acquisition of biodiesel plant since 2011. Recall in May 2011, GenP acquired Global Bio-Diesel (which has annual production capacity of 200k tonnes).

The latest acquisition has boosted GenP’s total annual production capacity for biodiesel by 50% to 300k tonnes.

Financial Impact

No immediate impact to near-term earnings.

The latest acquisition will bring down GenP’s net cash level from RM160.2m (as at 30 Sep 2013) to RM127.2m.

Pros/Cons 

The price tag (RM33m or RM303/tonne) seems fair relative to the two biodiesel plant acquisitions since 2011 (GenP paid RM200/tonne for the acquisition of Global Bio-Diesel in May 2011 while FGV paid RM350/tonne for the acquisition of 100k tonnes capacity biodiesel plant in Apr 2013).

Earnings Forecasts

Maintained, pending release of 4Q results later this week.

Risks

• Weaker-than-expected FFB output;
• Escalating labour cost, which will in turn result in higher production cost;
• Weaker-than-expected recovery in edible oil demand and prices; and
• Weaker-than-expected demand and prices of property in Johor.

Rating

BUY

Positives – (1) Increasing contribution from oil palm in Indonesia; (2) Strong balance sheet and (3) Potential upside surprises to earnings from JPO.

Negatives – (1) Weak near-term demand outlook for properties in Johor.

Valuation 

We are keeping our SOP-derived TP of RM12.20 and BUY recommendation on the stock unchanged pending its 4Q13 results announcement later this week

Source: Hong Leong Investment Bank Research - 24 Feb 2014