News    In an announcement to Bursa Malaysia, Boustead Holdings via its  wholly-owned Boustead Plantations Berhad (BPB) proposes to buy the 46.42% stake it does not own in Al-Hadharah Boustead REIT (AHB REIT) from unit holders for a total RM2.10 per unit via; (i) a proposed Selective Unit Redemption (SUR) exercise,  involving the redemption of all undivided interest in the Fund as constituted by the Trust Deed held by the Fund’s unit holders (except for the units held by BPB) for RM1.90 per unit; and (ii) a proposed special dividend of RM0.20 per unit to all unit holders (including BPB) of the fund.

The collective cash payment of RM2.10 per unit is at 12.0% and 16.7% premium above AHB REIT last traded price of RM1.87 and the REIT's net asset value of RM1.80 as of 31 March 2013, respectively. 

Upon completion of the proposals, expected to be completed by end 2013, BPB does not intend to maintain the listing status of AHB REIT. 

Comments    We believe buying the remaining stakes in AHB REIT  would allow Boustead Holdings to consolidate its plantation assets under BPB and thus potentially pave the way for an enlarged BPB to be listed on Bursa Malaysia over the next 12 to 18 months.

We are neutral on this corporate development. The acquisition of the remaining stake in AHB REIT will plug earnings “leakages” to the minority shareholder. However, over the short-to-medium-term, earnings from AHB REIT are expected to be lower YoY in FY13 due to weaker contribution from its plantation profit sharing scheme.  Recall, the profit sharing arrangement is between the parent, Boustead Holdings, and AHB REIT whereby the additional profit derived when CPO prices above RM2,250/MT after deducting incidental costs is split 50:50 between Boustead and AHB REIT.  The lacklustre performance of CPO price is expected to drag down earnings. 

Note that AHB REIT 1QFY13 net profit fell 34% to RM13.9m due to lower performance-based profit sharing of RM0.4m compared to 1QFY12 of RM6.9m. 

Overall, Boustead Holdings has 68,375 ha as at 2012 of land planted with oil palms. Since 91% of its plantations have already matured and have not been increasing over the past few years, their earnings growth hinges purely on higher CPO prices, the outlook of which is not looking promising for now. Furthermore, FFB yield per hectare is lower at 17.5 mt/ha compared to the industry average of 20.0 mt/ha.

Based on RM2.10 per unit, the acquisition works out to 1.1x consensus FY14 book value which appears cheap compared to the industry average of 1.2x multiple. Since AHB REIT is smaller in terms of earnings base and market capitalisation compared to other bigger REIT players, it should trade at a discount. As such, we believe the marginally lower valuation is fair. In terms of PER, the acquisition works out to 19.4x consensus FY14 EPS. However, at  annualised 1QFY13 net profit of RM13.9m, the PER works out higher at 23.9x.  

Boustead Holdings is expected to fund the proposal via internal funds or borrowings and advance to the fund. For illustrative purposes, assuming 100% borrowings, Boustead Holdings’ net debt and net gearing would increase from RM6.6bn to RM7.2bn and 1.4x to 1.5x as at 31 March 2013 respectively. Net impact to core earnings and RNAV is only marginally positive and not significant enough to warrant an upgrade in recommendation.

Outlook    Boustead’s prospects are bound to be mixed although we expect the trading & manufacturing, and pharmaceutical divisions to show growth with sustainable recurring incomes.  

Plantation earnings meanwhile will be more volatile hinging largely on CPO price movements. The outlook of the division’s growth prospect is not too promising since 91% of its plantations are already matured.

In the property division, the earnings growth here is likely to be flat as there has been no new launching of large-scale property projects. 

The heavy industries division is expected to remain stable. However, we are uncertain whether there will be any potential future cost overruns for its legacy commercial projects. 

Rating    Maintain MARKET PERFORM and SOP TP of RM5.52.  The saving grace is the 5.5% dividend yield.  Since the impact to earnings and our SOP target price is minimal, we are keeping our forecast and TP unchanged.

Source: Kenanga