News  Genting Plantation (GENP)’s wholly owned subsidiary, GP Overseas Limited (GPOL) had acquired the entire stake in SPC Biodiesel Sdn. Bhd. (SPC) for RM33m cash. SPC is principally involved in the manufacturing and sale of palm biodiesel and it owns a 100,000 mt biodiesel plant in Lahad Datu, Sabah. SPC was originally owned by Sterling Plantations Ltd. (a company listed on the Australian Securities Exchange).

 The rationale for the deal is that the acquisition is in line with GENP’s objective to venture into downstream oilpalm related activities.

Comments  Based on biodiesel capacity, the valuation for the deal works out to be RM330/mt. We believe the valuation is fair as it is close to the RM350/mt valuation for a biodiesel plant purchase made by FGV in Kuantan, Pahang in Apr-2013.

 We are neutral on the deal as we expect minimum impact to FY14E and FY15E earnings. However, over the longer term, the impact is more substantial as GENP should be able to modify the biodiesel plant to generate more specialized downstream products.

Outlook  The acquisition is unlikely to change GENP’s fundamentals as its outlook is still mainly driven by CPO prices.

Forecast  We maintain our core net profit estimate of RM279m and RM363m for FY13E and FY14E, respectively.

Rating Maintain UNDERPERFORM

 GENP is currently valued by the market at 20.5x FY14 PER which is the highest in the sector. For comparison, it is even higher than big cap planters which only trade at Fwd. PER valuation of below 20.0x. Given its smaller market cap, we do not think that GENP’s current valuation is justified.

Valuation  Maintain our TP of RM10.00 based on Sum-Of-Parts with plantation division valued at 18x Fwd. PE.

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

 Higher-than-expected downstream margin.

 Higher-than-expected sales and margin from property division.

Source: Kenanga