Highlights

• Genting Plantations (GENP)’s 73.7% subsidiary, Palmindo Holdings Pte Ltd proposed to acquire: 1. A 100% stake in CAA, which in turn, though its 95% owned subsidiary, PT Agro Abadi Cemerlang (AAC), holds the rights to develop approximately 8,095 ha of land in Kabupaten Sanngau, West Kalimantan (Indonesia) into oil palm plantation for US$34.55m; and 2. A 100% stake in PCI, which in turn, through its 95% subsidiary, PT Palma Agro Lestari Jaya (PALJ), holds the rights to develop approximately 13,900 ha of land in Kabupaten Sintang, West Kalimantan (Indonesia) into oil palm plantation for US$7.6m.

• The proposed acquisitions will increase GENP’s total plantation landbank (in both Malaysia and Indonesia) by 21,995 ha (or 9.2%) to 260,371 ha. Out of the 21,995 ha of land bank GENP proposed to acquire, 3127 ha of the landbank has already been planted with oil palm (and recorded FFB yield of 5.9 mt/ha in 2015).

• The proposed acquisitions are expected to be completed by 3Q16.

Pros/Cons

• Assuming the planted landbank is valued at US$7,000/ha, which indicates that GENP is paying circa US$1,042/ha. We believe the price tag is fair, given the close proximity between AAC and PALJ’s land to GENP’s other landbank in West Kalimantan. Besides, it will expedite GENP’s upstream expansion in Indonesia, as 3,127 ha have already been planted, hence raising GENP’s total planted area by 4.6% to 70,829 ha.

Earnings Forecasts

• Maintained, pending further update with management.

Risks

• Weaker-than-expected FFB production and OER;

• A sharp increase in production cost; and

• A sharp decline in vegetable oil prices.

Rating

HOLD

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

• Negatives – (1) Less upbeat overall demand outlook for property sector; and (2) low liquidity.

Valuation

Maintain SOP-derived TP of RM11.10 (see Figure 1) as well as our HOLD recommendation on the stock. While we like GENP for its decent FFB output growth, strong balance sheet, as well as its initiatives in expending into the downstream segment, we believe near-term upside is capped by its relatively pricey valuations.

Source: Hong Leong Investment Bank Research - 28 Jun 2016