News     Felda Global Ventures (“FGV”) announced that it had acquired the assets of Mission Biotechnologies Sdn. Bhd.’s (“MBSB”) for RM35m. The assets included a 100,000 tonne per annum biodiesel refinery sited on 6.0 acres of land and a 16,000-tonne tank storage in Kuantan, Pahang. We gather that the plant is expected to be fully operational by 1 July 2013.

We reckon that the rationale for the purchase is in line with FGV’s strategy to move further downstream in a bid to protect its upstream business.

Note that this is FGV’s first venture into the biodiesel refinery business and is part of its support for the Malaysian government’s B5 and B10 initiative.

According to FGV Group President Dato’ Sabri Ahmad, the B10 initiative (once implemented) can take out 1.0m tonnes of the current 2.1m mt palm oil stockpile in Malaysia.

Comments     We understand that in May 2011, a biodiesel manufacturing plant with a 200,000-tonne annual capacity in Sabah was transacted at RM40m or at a valuation of RM200/tonne of annual capacity.

Although the valuation for MBSB works out to be higher at RM350/tonne of annual capacity, we believe that the valuation is fair considering that the purchase comes together with a 16,000-tonne tank storage.

We are positive on the deal as increased biodiesel usage should eventually lead to a lower palm oil inventory in Malaysia and hence better CPO prices. For every RM100/mt increase in the average CPO price, we expect FGV’s core earnings to increase by 13%.

Outlook    Despite our positive view on the deal, we remain concerned on the short-term outlook for FGV’s plantation division earnings, which should contribute at least 75% of the group’s gross profit in FY12 based on our estimate.

As CPO prices in 1QCY13 have been weak at an average of RM2324/mt, we believe that FGV’s 1QCY13 earnings will likely miss the consensus estimate. Note that the consensus is still estimating an average CPO price of RM2750/mt (against our estimate of RM2500/mt).

Forecast     Maintaining our FY13E-FY14E core net profits of RM782m-RM976m.

Rating     Maintain UNDERPERFORM

Valuation     Maintaining our Target Price of RM4.00 based on a Fwd. PER of 18.7x on its FY13E EPS of 21.42 sen.

Risks     Better than expected CPO prices.

Source: Kenanga