HAPL announced that it is acquiring a 55% stake in Kretam for RM1.18bn. Upon completion, HAPL is obliged to extend a MGO for the remaining shares at a cash offer price of RM0.92/share. We believe this proposed acquisition is consistent with the group’s plan to further expand their palm oil businesses in Sabah and this should contribute positively to the group as we believe HAPL’s expertise in estate management could further improve Kretam’s operations. Assuming that the new acquisition is fully funded via bank borrowings (excluding MGO), HAPL’s gearing ratio will increase to about 0.58x. At this time, we maintain our FY17-19E forecasts as well as our HOLD rating on HAPL with an unchanged TP of RM2.58.

Proposed Acquisition of Kretam Holdings Berhad

Hap Seng Plantation (HAPL) announced that it had entered into a conditional share sale agreement with Datuk Lim Nyuk Sang and Santraprise Sdn Bhd to acquire 779,336,900 shares (approximately 33.5% equity interest) and 500,857,600 shares (approximately 21.5% equity interest) in Kretam Holdings Berhad (Kretam), respectively, for a total cash consideration of RM717m (or RM0.92/share) and RM461m (or RM0.92/share). The acquisition purchase consideration of RM0.92/share represents a premium of about 11.1% to the five day weighted average market price of Kretam shares. Upon completion of the acquisition, HAPL will also be obliged to extend a Mandatory General Offer (MGO) for the remaining shares at a cash offer price of RM0.92/share. The principal business of Kretam are cultivation of palm oil, milling and sale of palm oil products, refining of palm oil, manufacturing of bio fuels as manufacturing and sales of fertilisers.

Good Addition to the Company in the Long-run

We believe the proposed acquisition is consistent with HAPL’s plan to further expand its palm oil plantation business and gain larger market access, especially in the downstream operations, in Sabah. Kretam has a total land bank of about 23,865 ha in Sandakan, Lahad Datu and Tawau regions, of which 18,425 ha are matured areas, while HAPL has a total land bank of about 40,279 ha in Lahad Datu, Tawau and Kudat, of which 32,374 ha are matured areas. Taking into account the scarcity of sizeable and suitable palm oil plantation land, particularly in Sabah, the proposed acquisition is considered a strategic investment for HAPL. We believe the acquisition could contribute positively to the group as HAPL’s expertise in estate management could further improve Kretam’s operations.

Source: Affin Hwang Research - 22 Feb 2018