News  Genting Plantation (GENP) has announced that it is selling a 25% stake in Genting Integrated Biorefinery Sdn Bhd (GIB) to Elevance Renewable Sciences Singapore Pte Ltd (ERS). The deal is done at

RM72.0m cash and GENP will still own the remaining 75% stake in GIB post the deal. Currently, GIB owns a 200,000 MT biodiesel plant located at Lahad Datu, Sabah. ERS is owned by Elevance Renewable Sciences, Inc (Elevance).

 GENP and ERS have also signed a collaboration agreement to produce high value palm oil derivatives

(HVPOD) such as olefins, specialty chemicals and saturated methyl esters. Based on the agreement signed, GIB will pay Elevance a sum of USD28.1m (or RM89.5m). As a return, Elevance shall grant GIB a fee-bearing, irrevocable, non-transferable, nonexclusive license under its patent rights for metathesis technology, and utilising the catalysts to produce and sell the HVPOD. Elevance shall provide GIB knowledge transfer, technical and consulting services in connection with the engineering, design and construction of the metathesis plant. This means the 200,000 MT biodiesel plant owned by GIB will be converted into a metathesis plant which is expected to commence operation in the year 2017.

 We gather that Elevance is a USA-based company which has a Nobel-prize winning and patentprotected metathesis technology, which is more efficient in producing natural oil compounds. Elevance’s first metathesis plant with capacity of 180,000 MT located in Gresik, Indonesia has begun its first commercial shipments in 2013 in collaboration with Wilmar. Note that metathesis is a chemical reaction in which different kinds of molecules exchange parts to form other kinds of molecules.

 Justification for the deal and the collaboration with Elevance is that it is in line with GENP’s objective to vertically integrate into downstream activities to diversify its income base and reduce sole dependency on upstream plantation business.

Comments  We are neutral on the deal as we expect earnings impact only from FY17E onwards. In addition, GENP is selling its stake at cost hence no gain or loss should result from the deal.

Outlook  FY14E CNP is expected to improve by 20% YoY to RM395m due to better CPO prices. However, its valuation of core PER of 21.7x may signal that the market has overshot GENP’s near-term growth prospects.

Forecast  Maintain FY14E-FY15E CNP of RM395m-RM400m. We believe that near-term earnings impact is limited as the metathesis plant is expected to be completed in 2017.

Rating Maintain UNDERPERFORM

 Despite its lower market cap, GENP’s Fwd. PE valuation of 21.5x has exceeded some big cap planters such as SIME (15.9x Fwd. PE) and KLK (18.9x Fwd. PE). Hence, we believe that its share price is overvalued.

Valuation  Increase our TP to RM11.20 (from RM10.85) after updating the property division RNAV to reflect latest land prices in Johor. We have also rolled over our SOP valuation to FY15E earnings (from FY14E previously).

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

 Higher-than-expected earnings from property division.

Source: Kenanga