News    Felda Global Ventures (“FGV”) has proposed to undertake the offer to acquire all Pontian United Plantations (“Pontian”) shares for a total cash consideration of RM1.21b. This is based on the price of RM140 per share on 8.65m total Pontian shares. 

We gather that the offer is conditional as it will be valid if FGV received more than 50% of Pontian’s shares. As of 18-July-2013, FGV has obtained irrevocable undertakings from multiple Pontian shareholders amounting to a 23.81% stake.

Note that Pontian owns 40,000 acres (16,188 ha) plantation, which is mostly in Sabah (Kinabatangan and Lahad Datu). In addition, Pontian owns a CPO processing mill with capacity of 90 mt/hour.

Comments    We believe the valuation of the deal at RM74,794/ha is fair as it is comparable to valuation of RM75,000 –RM80,000 per ha for matured Sabah plantation estate. As the surrounding area has been developed into palm oil estate many years ago, we believe more than 95% of Pontian estates are matured with FFB yield comparable to other Sabah estates at 28 mt/ha.

We are positive on the deal as FY14E earnings may increase by 6% to RM950m if the deal materializes. Although the valuation of Pontian at 30.7x historical PE is higher than FGV’s 21.6x, the premium is justified as we believe Pontian’s FFB yield should be higher at 28 mt/ha (against FGV’s 20 mt/ha).

Outlook   If the deal materialize, FGV’s efficiency should increase slightly due to expected overall increase in FFB yield/ha.

However, current low CPO prices are likely to keep FGV share price upside limited.

Forecast   Pending the possible acceptance of more than 50% from Pontian shareholders, we maintain our FY13EFY14E core earnings of RM723m-RM895m.

Rating Maintain MARKET PERFORM

Valuation    Maintain TP of RM4.60 based on unchanged 18.7x Fwd.

PE on CY14E EPS of 24.5 sen.

Risks   Lower than expected CPO prices.

Source: Kenanga