News    Felda Global Ventures (FGV) announced that it has entered into two agreements to acquire a total of 21,037 ha of plantation lands in West Kalimantan for RM44.2m.

The first deal valued at RM25.9m, will be for a 95% stake in PT. Temila Agro Abadi (“PTTAA”) which owns 8,193 ha of oil palm plantation land bank, out of which 1,000 ha has been granted Plantation Permit status with the balance still in Location Permit status. In addition, we gather that 725 ha have been planted with palm oil trees currently at the immature stage. Management estimated that the cost to further develop the land at USD34.3m (equivalent to RM106m*).

The second deal will be for a 95% stake in PT. Landak Bhakti Palma (“PTLBP”) for RM18.3m. PTLBP owns 12,844 ha of green field rubber plantation land bank with Location Permit status. Estimated cost to develop the land is USD63.2m (equivalent to RM196m*).

Comments    The combined effective valuation of both land deals works out to be RM2213/ha which is fair in our view. While we were unable to find similar comparison, a green field pure palm oil plantation land bank with Location Permit in East Kalimantan was recently transacted at RM2,732/ha in mid-2013.

We are neutral on the announcement as the deals would increase FGV’s total land bank by a marginal 6% to 364,558 ha. In addition, any earnings impact would only be reflected in FY2017 due to the three-year gestation period of palm oil trees and not forgetting the substantial initial investment outlay. 

Outlook   Current weak CPO prices are limiting the share price’s upside potential. However, its downside risk appears to be limited as it is trading near to its IPO price of RM4.55.

Forecast   Maintain our FY13E-FY14E core earnings forecasts of RM723m-RM895m. As palm oil trees only mature and start to bear fruits after three years, any impact  on earnings would only be felt in FY17.

Rating   Maintain MARKET PERFORM

Valuation    Maintaining our TP of RM4.60 based on an unchanged 18.7x Fwd. PER on CY14E EPS of 24.5 sen.

Risks   Lower than expected CPO prices.

Lower than expected margin for its downstream business.

Source: Kenanga