Highlights

• Genting Plantations (GENP)’s wholly-owned subsidiary AsianIndo Holdings Ptd Ltd entered into a conditional S&P agreement with Lee Rubber to acquire 100% stake in Knowledge One Investment (KOI), which in turn holds an 85% stake in PT Kharisma Inti Usaha (KIU) for US$95m (or RM408m).
• KIU holds the rights to cultivate 14,661 ha of oil palm plantation land and a palm oil mill (with capacity of 60mt/h) in Kabupaten Tapin, Provinsi Kalimantan Selatan. Of the total land, 12,893 ha have already been planted, while 11,555 ha of the planted landbank have age profile of over 4 years old. FFB production of the planted landbank has increased from 55,116 tonnes in 2014 to 95,181 tonnes in 2016. The acquisition will provide potential benefits from operational synergies and economies scale, given its close proximity to GENP’s other landbanks in Central Kalimantan.
• Upon completion, the acquisition will increase: (1) GENP’s total plantation landbank and planted landbank (in both Malaysia and Indonesia) by 6.4% and 17.9% to 242,597 ha and 84,833 ha respectively; and (2) GENP’s total oil mill capacity in Indonesia by 30.8% to 255mt/h.
• The acquisition is expected to be completed by 4Q 2017.

Pros/Cons

• Pricing wise…The price tag (after taking into account of the purchase price of US$95m and borrowings of US$71.6m) translates to an EV/ha of US$10,400/ha (assuming the oil mill is valued at US$14m or US$233/t), which seems fair to us given the potential synergistic effect with its other landbanks in Central Kalimantan..
• Financial impact wise… The acquisition will increase GENP’s net debt and net gearing from RM939m and 0.2x (as at 31 Mar 2017) to RM1.25bn and 0.26x respectively. Negligible impact to earnings given GENP’s large earnings base.

Earnings Forecasts

• Maintained, pending completion of the acquisition.

Risks

• Weaker-than-expected FFB production and OER;
• A sharp increase in production cost; and
• A sharp decline in vegetable oil prices.

Rating

HOLD (↔)

• While we like GENP for its efficient management team, young age profile, and healthy balance sheet, we believe near-term upside is capped by the weak property sentiment in Johor, a drag on its earnings growth.

Valuation

• Maintain SOP-derived TP of RM12.21 as well as our HOLD recommendation on the stock.

Source: Hong Leong Investment Bank Research - 21 Aug 2017