Highlights

• HSP entered into a conditional share sale agreement to acquire a 55% stake in Kretam Holdings Bhd (KHB) from Datuk Lim Nyuk Sang @ Freddie Lim (major shareholder of KHB) for RM1.18bn (or RM0.92 per KHB share). Upon completion of the proposed acquisition, HSP will control a 55% stake in KHB, which in turn triggers an MGO for the remaining shares at an offer price of RM0.92 per KHB share.
• KHB has: (1) Total land bank of 23,865 ha in Sabah, of which 19,623 ha (or 82.2%) are planted with oil palm; (2) 3 palm oil mills with total capacity of 135 mt/hour; (3) A refinery with a capacity to process 1,500mt of CPO per day and a 300mt/day biodiesel plant; and (4) A fertilizer plant producing an average of 30,000mt/annum.
• HSP has the intention to maintain the listing status of KHB pursuant to the proposed MGO, as Datuk Lim (the major shareholder of KHB) has undertaken not to accept the MGO for the remaining 15.3% stake in KHB held. The board will explore commercially viable proposals) to rectify KHB’s non-compliance with the public shareholding spread.
• The proposals are expected to complete by 3Q18.

Comments

• The latest acquisitions will result in HSP’s plantation land bank and planted area increasing by 59.2% and 54.3% to 64,144 ha and 55,622 ha, respectively. Age profile wise, the proposed acquisition will lower HSP’s average age marginally to ~15 years (from 15.3 years at as 31 Dec 2016).
• Pricing wise. The proposed acquisitions values KHB’s oil palm land bank at ~RM82k/ha (assuming its refinery and palm oil mills are valued at 1x book value and RM1m/mt/hour), which seems fair in our view, given the proximity of KHB’s oil palm land bank to HSP’s existing land bank and scarcity of available land bank in Sabah.
• Neutral. While the latest move will expand HSP’s plantation bank substantially, the deal may not be earnings accretive to HSP (upon consolidation), as earnings contribution from KHB will be more than offset by additional interest expense incurred arising from the acquisitions.
• Balance sheet wise… The consolidation of KHB into HSP will turn HSP into a net debt company (with net debt and net gearing of RM1.97bn and 0.88x) from net cash of RM161.6m (as at 31 Dec 2016).

Risks

• Weaker-than-expected FFB production.
• A sharp decline in vegetable oil prices. Forecasts Maintain for now, pending release of FY17 results and/or completion of the transaction.

Rating

BUY (↔), TP: RM2.89

• HSP has shown the unique aptitude for capturing high CPO selling prices due to its RSPO certification which allows it to sell its CPO for a premium.

Valuation

• Maintain TP of RM2.89 (based on 18.5x FY18 EPS of 15.6 sen).

Source: Hong Leong Investment Bank Research - 22 Feb 2018