News  Felda Global Ventures Holdings (FGV) has announced its proposal to acquire 112.2m shares or 51% stake in Felda Holdings Berhad (FHB) for RM2.2b cash or approximately at RM19.61 per share. Note that FGV currently already own 49% stake in FHB and hence FHB will be wholly-owned by FGV upon completion of the proposed exercise. Expected completion date is end-2013. Note that the deal will be funded by a combination of proceeds raised from the IPO and debts with the exact proportion to be determined later. (More details at Page 2).

Comments  Effective valuation for FHB is RM4.31b and this represents 11.1x historical PE and 1.19x PB. FHB is also in net cash position of RM943m. Although there is no direct comparison business model to FHB, we believe that the deal is fair as it is close to our Sum-Of-Parts valuation estimate of RM4.44b (as per page 2).

 We are slightly positive on the deal as we expect FGV FY14E earnings to improve by between 3%-5% should the deal materialize. Higher earnings should come from (i) FHB’s palm oil milling, (ii) R&D estates which produce FFB and (iii) fertilizer production divisions.

 Balance sheet impact should be minimal as FGV still has net cash of RM4.01b as at end-Jun 2013. Even after the Pontian deal purchase involving RM1.20b, the Group should still have about RM2.80b net cash. In our view, this should allow FGV to fund the deal through mostly cash instead of debt.

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

Forecast  Pending the approvals from Kumpulan Permodalan Felda (KPF) and FGV shareholders, we keep our FY14E core earning at RM890m at this juncture. FY13E core earning is maintained at RM605m as the impact should only be minimal as the deal is expected to materialize earliest in Dec-2013.

Rating Maintain MARKET PERFORM

Valuation  Our TP is maintained at RM4.55 based on unchanged 18.7x Fwd. PE on CY14E EPS of 24.4 sen.

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

 Worse-than-expected margin in downstream division. 

Source: Kenanga