THE BUZZ 

SOP has entered into a sale agreement to purchase the remaining 40% and 35% equity interests  in  its  subsidiaries,  SOP  Beluru  and  SOP  Kemena,  for  a  combined  cash consideration RM242.5m. The seller is SOP's major shareholder, Shin Yang Holdings.  

OUR TAKE  

The land. SOP Beluru has a total planted area of 12,352 ha in Miri, Sarawak, the vast majority  of  which  is  immature.  The  trees  in  the  estates  are one  to  four  years old.  SOP Kemena,  meanwhile,  has  a  planted  area  of  9,974  ha  in  Bintulu,  with  most  trees  of between  three  and  five  years  old.  The  Kemena  estate  began  producing  FFB  in  2010, with a FY11 yield of 6.6 tonnes per planted ha (we estimate the estate's FY11 FFB yield to be about 8.3 tonnes per mature ha). Production from these two estates is still far from peaking  given  their  very  young  tree  age  profiles  but  we  expect  output  to  increase organically  as  the  trees  mature  over  time.  Beluru  sits  on  peat  soil,  while  some  80%  of Kemena is on peat.

A  good  deal.  Despite  the  purchase  being  a  related  party  transaction  (note  that  Shin Yang  is  the seller),  we  believe  that  SOP  got  a  favourable deal  with  this  purchase.  The blended  transaction  price  per  ha  is  USD9,400  per  ha,  substantially  cheaper  than  the valuation for TSH's bid for Pontian United Plantations at an estimated ~USD16k-20k per ha, and similar to the fairly cheap USD9,250 per ha valuation that the Samling group is offering to take Glenealy Plantations private at. The purchase of a 35% equity interest of the FFB-producing Kemena estate will place the transaction at an implied price per ha of USD11,200 and the largely immature Beluru at USD8,100 per ha. Both the estates have already been under SOP's care since initial planting.

Financial  impact.  Being  a  cash  transaction,  the  purchase  will  give  rise  to  an incremental  interest  expense  of  RM4.4m  per  year  for  the  RM100m  that  SOP  will  be borrowing to fund the purchase. SOP currently sits on a marginally net debt position of RM42.8m. With  the  trees still very  young  (and  hence  not  as  productive  as fully  mature ones),  the  estates  are  likely  to  simply  break  even  at  the  moment.  As  such,  minority interest  reduction  is  likely  to  be  minimal  in  FY13.  Over  the  next  five  years,  however, SOP's increased equity interest in its subsidiaries could save the company RM17.2m a year  in  minority  interest  leakages,  assuming  a  CPO  price  of  RM3,000,  16-tonne  FFB yield (since some of these trees will yet hit peak in five years' time) and a 20% net profit margin.  We  understand  that  Beluru,  being  a  largely  immature  estate,  is  loss-making while Kemena is marginally profitable.

Maintain BUY. We are marginally trimming our FY12 and FY13 earnings estimates by 0.2% and 1.0% respectively to incorporate transaction expenses amounting to RM0.77m for  FY12  and  incremental  before-tax  interest  expenses  of  RM4.4m.  We  believe  that minority  interest  savings  will  start  to  kick  in  materially  in  FY14  when  the  trees  further mature. Our FV is revised a tick lower to RM9.27, based on a 13.0x FY13 PE.

Source: OSK