News  Felda Global Ventures (“FGV”) announced that the Group has received in total, valid acceptances of 50.25% (or 4.35m shares) of Pontian United Plantations (“Pontian”) shares. Hence, FGV’s offer to acquire Pontian shares has become unconditional as to acceptances and we believe FGV shall be able to consolidate Pontian’s earnings from FY14 onwards. Note that FGV’s final stake in Pontian should be more than the current level of 50.25% as its offer to Pontian shareholders is still open until 17-Sep-2013.  

Recall that on 18-July-2013, FGV has proposed to undertake the offer to acquire all 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 Pontian owns 40,000 acres (16,188 ha) plantation, which is mostly in Sabah (Kinabatangan and Lahad Datu). In addition, Pontianowns a CPO processing mill with capacity of 90mt/hour.

Comments  We are positive on the deal as FY14E earnings should increase by 3% based on the conservative 50.25% stake. We think 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. 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 than FGV’s 20 mt/ha.

Outlook  Despite our positive view on the deal, current low CPO prices are likely to keep FGV share price upside limited.

Forecast  Pending the actual level of acceptance from Pontian shareholders, we maintain our FY13E-FY14E core earnings of RM605m-RM871m.

Rating Maintain MARKET PERFORM

Valuation  Maintain TP of RM4.45 based on unchanged 18.7x Fwd. PE on CY14E EPS of 23.9 sen.

Risks  Lower than expected CPO prices.

 Worse than expected margin for its downstream division.

Source: Kenanga