According to its managing director, Rajawali Corp would want to raise its shareholding in FGV from 2.55% under the proposed acquisitions to 21% should  FGV  decide  to  seek  a  controlling  stake  in  PT  Eagle  High Plantations Tbk (BWPT), which is currently 65.5% owned by the Rajawali Group. He added that potential stake increase could be in the form of a share swap. (Source: The Edge Financial Daily)

Comments: Whether the prospect of the Rajawali Group raising its stake in FGV is positive or not depends on the share swap prices. Based on the pricing under the proposed acquisitions, acquiring the other 28.5% stake in BWPT held by the Rajawali Group would cost approximately US$600m or RM2,262m (at US$1.00=RM3.77).

At an assumed price of RM1.86 (as in the  proposed  transactions)  that  would  require  the  issue  of  approximately 1,216m new FGV shares, thereby enlarging its issued share capital from 3,648.2m to 4,959.6m (including the 95.4m shares to be issued under the proposed acquisitions).

Based on consensus net profit forecasts for BWPT, the  potential  2016E  EPS  dilution  will  increase  from  8.3%  (with  a  37% stake) to 22.7%, which implies that a share swap through the issue of new FGV shares at RM1.86 is unlikely to be well received. Incidentally, 2017E would turn into slightly EPS accretive to EPS dilutive.

It  remains  to  be  seen  if  FGV  would  want  to  raise  its  stake  in  and  gain management  control  of  BWPT  and  if  it  does,  at  what  price  and  form. Maintain  HOLD  and TP of RM1.92 (which has not taken into account the potential EPS dilution if the proposed acquisitions are implemented).

Source: Affin Hwang Capital Research - 26 Jun 2015