Highlights

Sime Darby has been selected as the preferred party to negotiate the acquisition of Kulim’s 49% stake in New Britain Palm Oil (NBPOL), and it has entered into exclusive discussions with Kulim to finalise the terms of the transaction for 60 days.

NBPOL is an integrated plantation player, with ~80k ha of planted oil palm plantations, 7.8k ha of sugar cane, 9.2k ha of grazing pasture, and 12 oil mills in Papua New Guinea (PNG) and Solomon Island. Besides, it also owns 2 refineries (in Liverpool, UK and West New Britain, PNG).

Given that most of NBPOL’s plantations are in PNG, it is subject to the PNG Takeovers Code, which in turn states that a stake of more than 20% of a PNG company could only be acquired if all shareholders approve the proposed acquisition.

In 2013, Kulim attempted to raise its stake in NBPOL from 49% to 69% for RM812.3m (or £5.50/share). The takeover bid was rejected by the PNG Government, and Kulim was also asked to sell down some of its shares in NBPOL to the respective provincial governments where the NBPOL assets are located.

Comments

It is premature to assess the impact of this move for now, as it depends on the acquisition price and subject to blessings from the PNG Government and NBPOL’s shareholders (we believe).

Assuming Sime Darby offers to acquire Kulim’s stake in NBPOL for £5.50/share (the price tag Kulim offered last year), the transaction will cost Sime Darby RM2.18bn, and values NBPOL’s land bank at ~RM46k/ha (planted).

Earnings Forecasts

Maintained for now.

Risks

• Sharp fall in FFB output and/or palm product prices at the plantations division;
• Prolonged weak demand for mining equipment; and Delay in property launches.

Rating

HOLD

Positive – Strong balance sheet.

Negatives – (1) Weak global economic outlook, coupled with the impending excess supply of CPO will affect both demand and prices of CPO; (2) Cooling economic activities in China and Australia may have an adverse impact on Sime Darby’s earnings; and (3) Overseas expansion risk.

Valuation

Maintain SOP-derived TP of RM10.02 (see Figure 1).

Source: Hong Leong Investment Bank Research - 1 Aug 2014