News  FGV announced that it has proposed to acquire Asian Plantations Limited (APL) for a total cash consideration of GBP120m or RM628m. This represents GBP2.20 per share or 3.5% above the last transacted price of GBP2.1250. Note that APL is listed in Alternative Investment Market of the London Stock Exchange. We gather that APL owns in total 24,662 ha of landbank with 16,000 ha planted with oil palm trees (out of which 5,153 ha matured). APL’s landbank is located in Miri and Sibu, Sarawak.

 Separately, FGV announced that it has entered into JV with M2 Capital (M2C) and Benefuel International (BI) with FGV taking 60% stake in the JV. M2 and BI each has 20% stake. We gather that the JV will acquire a 250,000 MT per annum biodiesel plant in Kuantan, Pahang for USD22.5m (or RM71m).

Comments  We are neutral on the news of APL acquisition. Effective valuation works out to be around RM25,500/ha which we think is fair as it is near to landbank valuation there. Additionally, APL owns a 60MT/hour palm oil mill. On the positive side, FGV landbank should increase 7% to 380,526 ha (from 355,864 ha currently). However, we gather that APL is still making loss of USD10.4m in FY13 possibly due to its young estate profile with only 32% matured so far. Hence, we expect earnings contribution to only come in from FY16E onwards as more trees mature.

 As for the biodiesel plant purchase, the valuation works out to be RM283.50 per MT of capacity which we think is fair. Although it is lower than previous FGV purchase of another 100,000 MT biodiesel plant in similar area for RM350 per MT capacity, the latter biodiesel plant comes with a 16,000 MT tank storage. We are neutral overall on the biodiesel news as we expect its earnings impact to be minimal in the near-term as the JV is supposed to refurbish and retrofit the current plant before resuming its operation.

 Collectively, FGV total investment of RM698m should cause its balance sheet to be in the net gearing* of 0.02x for the first time against net cash position of RM559m as of Jun-2014. We have excluded Land Lease Agreement (LLA) Liability in our net gearing calculation.

Outlook  Recall that in the recent results announcement the management believes that the market conditions and price of CPO are challenges facing the plantation industry and FGV’s performance is likely to also toe the line. We share the same view and believe that FGV plantation division is likely to make losses if average CPO prices sustain at below RM2000/MT for an extended period. Nevertheless, we believe that CPO prices should have already bottomed out and improve in 4Q14.

Forecast  Maintain FY14E-FY15E core earnings of RM650m-RM713m. As explained above, both deals are not expected to have an impact in near-term earnings.

Rating Maintain MARKET PERFORM

 Upside is limited due to low CPO prices currently. However, downside is also limited as it is already trading below its IPO price.

Valuation  Maintain TP of RM4.00 based on unchanged 20.5x Fwd. PE on FY15E EPS of 19.5 sen. Our 20.5x Fwd. PE is based on -2SD valuation as its FFB growth prospect is the lowest in the industry.

Risks  Lower-than-expected CPO prices.

 Worse-than-expected performance from downstream operations.

Source: Kenanga