News  Felda Global Ventures (FGV) announced that it has successfully acquired 100% equity stake (or 8.65m shares) in Pontian United Plantations (Pontian).

 Recall that on 18-July-2013, FGV 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 and 8.65m Pontian shares. We gather that Pontian owns 16,188 ha of plantation estate, located mostly in Sabah (Kinabatangan and Lahad Datu). In addition, Pontian operates a CPO processing mill with capacity of 90mt/hour and a kernel crushing facility. FGV also mentioned that Pontian owns plantation land in Kukup, Johor in a strategic location due to its proximity to the Tuas second link between Johor and Singapore.

Comments  We are positive on the deal completion as it will now result in higher CPO output by 80,000 mt for FGV. This should boost our FY14E CPO output by 6% (from FGV own estate only) to 1.38m mt. 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.

 Nevertheless, higher transportation cost in view of the recent rise in petrol and diesel prices would marginally nibble into earnings improvement, resulting in a small incremental forecast adjustment (refer below).

Outlook  Current low CPO prices are likely to keep FGV upside limited for the time being.

Forecast  FY14E core earning is increased by 2% to RM890m after assuming higher CPO volume (+6%) but also higher CPO production cost (+2%). FY13E core earning is maintained at RM605m as the impact should only be felt after 4Q13.

Rating   Maintain MARKET PERFORM

Valuation  Our TP is increased by 2% to RM4.55 based on unchanged 18.7x Fwd. PE on higher CY14E EPS of 24.4 sen (from 23.9 sen).

Risks to Our Call Lower-than-expected CPO prices.

 Worse-than-expected margin in downstream division.

Source: Kenanga