News  In an announcement to Bursa Malaysia, Boustead Holdings via its wholly-owned Boustead Plantations Berhad (BPB) has entered into a sale and purchase agreement with Uniglobal (wholly-owned subsidiary of Harn Len Corporation Bhd) to acquire two pieces of leasehold land held under country lease measuring approximately in total 2,409.8 hectares (ha) for a total cash consideration of RM185m (a discount of RM603,175 or 0.33% over the indicative market value of RM185,200,000).

 Note that Land 1 and Land 2 planted areas are 2,023 ha and 386.8 ha respectively.

 Both parcels of land are located in the District of Lahad Datu, Sabah with oil palm plantations.

 According to Harn Len Corporation Bhd announcement to Bursa Malaysia, this deal is expected to be completed by Jan 2014.

Comments  Based on the land size and acquisition price of 2,409 ha and RM185m, respectively, the price works out to be RM76,602 per ha, which appears to be slightly expensive considering that the latest transacted price within the vicinity was RM74,794 per ha with FFB yield averaging 20 mt/ha. In contrast, the average FFB yield per ha for this plantation land is well below industry average at 14.7 mt/ha and 17.1 mt/ha for Land 1 and Land 2, based on annualised YTD Aug 2013 FFB yield, respectively. Recall, Felda Global recently acquired the Pontian plantation land which is mostly in Sabah Kinabatangan and Lahad Datu at RM74,794 per ha. Additionally, we understand that matured Sabah plantation estate is valued at RM75,000 – RM80,000 per ha with FFB yield averaging 20 mt/ha.

 Given the below industry average yield and the current low CPO price, earnings contribution to Boustead Holdings would be minimal.

 The proposed acquisition is in line with Boustead Plantations Berhad (BPB) and its subsidiaries’ plans to further expand into oil palm activities in Malaysia. Recall, Boustead recently proposed to buy the remaining stakes in Al-Hadharah Boustead REIT (AHB REIT) which owns plantation land. This would then 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.

 Overall, Boustead Holdings owns 68,375 ha of land planted with oil palms as at 2012 (including 19,945 ha leased from AHB REIT). Since 91% of its plantations are already matured without any expansion over the past few years, earnings growth hinges purely on higher CPO prices; a not so promising prospect currently. Furthermore, FFB yield per hectare is lower at 17.5 mt/ha compared to the industry average of 20.0 mt/ha.

 Boustead Holdings is expected to fund the proposal via internal funds or borrowings. For illustrative purposes; assuming 100% borrowings, Boustead Holdings’ net debt and net gearing would increase from RM6.8bn to RM7.0bn and 1.4x to 1.5x as at 30 Jun 2013 respectively. However, upon completion of the RM611m acquisition of AHB REIT, overall net debt is expected to be much higher.

Outlook  Boustead’s prospects are seen 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 is likely to be flat due to the absence of 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.

Source: Kenanga