• FGV Holdings (FGV) largest shareholder, FELDA, has proposed to acquire a 13.88% equity interest in FGV from KWAP and Urusharta Jamaah for a total consideration of RM658m or RM1.30/share. This is similar to our fair value of FGV at RM1.31
• FELDA is also obliged to extend a mandatory take-over offer for all the remaining FGV shares not already owned by FELDA and the PACs. This will cost FELDA a further RM2.26bn
• No changes to our FGV 2020-22E earnings, maintain our HOLD rating on FGV with an unchanged TP of RM1.31 (based on PER of 28x on 2021E core EPS

FELDA to acquire a 13.88% equity interest in FGV

According to Bursa Malaysia, FGV’s largest shareholder, Federal Land Development Authority (FELDA), has proposed to acquire c. 13.88% equity interest (or 506.19m shares) in FGV for a total consideration of RM658m or RM1.30/share (i. conditional share purchase agreement with Kumpulan Wang Persaraan (KWAP) for the purchase of 222.48m FGV shares, representing c. 6.1% equity interest, for cash consideration of RM289.2m; and ii. conditional share purchase agreement with Urusharta Jamaah Sdn Bhd (Urusharta Jamaah) for the purchase of 283.71m FGV shares, representing c. 7.78% equity interest, for a cash consideration of RM368.8m). Upon completion of the proposed acquisition, FELDA together with the Persons Acting in Concert with it (PACs) will collectively hold more than 50% of FGV shares.

Proposed mandatory take-over offer at RM1.30

Thus, in accordance with Capital Markets and Services Act, 2007 (CMSA), FELDA is obliged to extend the proposed mandatory take-over offer for all the remaining FGV shares not already owned by FELDA and the PACs for a cash consideration of RM1.30/share. Based on our estimate, this will cost FELDA a further c. RM2.26bn (for the remaining 47.7% equity interest).

Rational for proposals

The proposed acquisition represents an opportunity for FELDA and the PACs to obtain statutory control of FGV in order to pursue its transformation plan and to restructure FELDA and its related companies. This is to strengthen its core business in the plantation industry. The proposed acquisition will enhance FELDA’s ability to control the plantation land and the integrated value-chain of FGV and its subsidiaries – providing access to high value-added downstream activities undertaken by FGV. Also, the total proposed acquisition and mandatory take-over offer of c. RM2.92bn is cheaper than terminating the Land Lease Agreement (LLA) and paying the company an estimated RM3.5-4.3bn compensation, in our view.

Offer price is on par to our fair value

The proposed offer price of RM1.30 is similar to our target price of RM1.31 (based on PER of 28x on 2021E core EPS) and represents a 2.36% premium to FGV’s presuspension price on 7th December at RM1.27. We believe that the offer made seems reasonable, comparable to the plantation sector’s 2021E average PER of c. 32x, with a discount given the uncertainties surrounding the US CBP’s WRO (Withhold Release Order) on FGV’s palm-oil and palm products that has an adverse impact to the company’s image and reputation. On the flip side, we are mindful that some minority shareholders will not find the offer appealing considering FGV’s IPO reference price of RM4.55. Note that it is not mentioned whether FELDA intends to maintain the listing status of FGV.

Maintain HOLD with TP unchanged at RM1.31

We make no changes to FGV 2020-22E earnings in this report. Maintain our HOLD rating on FGV with an unchanged TP of RM1.31, based on an unchanged PER of 28x on 2021E core EPS.

Key risks

Key upside/downside risks include: 1) stronger/weaker economic growth leading to a higher/lower consumption of vegetable oils; 2) a sustained rebound/plunge in CPO prices; 3) higher-/lower-than-expected FFB and CPO production; 4) stronger/weaker demand for sugar products; and 5) changes in policies.

Source: Affin Hwang Research - 9 Dec 2020