News  Sime Darby Berhad (SIME) has announced that it is making a General Offer in cash for all the issued and to be issued shares in New Britain Palm Oil Limited (NBPOL) at GBP7.15 per share. The transaction valued NBPOL at GBP1.07b or RM5.63b. (Refer Page 2 for details on the conditions of General Offer).

 We gather that NBPOL owns in total 134,611 landbank out of which 79,885 ha (59%) has been planted with palm oil. Average age of the estate is 10.8 years which is virtually close to the prime age of 10.0 years.

 If the deal is successful, SIME is expected to increase its planted oil palm landbank by 15% to 613,021 ha.

 Another 9,282 ha (7%) are used for grazing pasture, 7,718 ha (6%) for sugar cane and other areas 37,727 ha (28%). Lastly, about 22,000 ha out of the 37,727 ha are plantable.

Comments  Valuation wise, the EV/planted area works out to be RM82,300/ha which we think is fair. In our view, the most comparable deal is IOICORP’s acquisition of Unico-Desa Plantation in Oct-2013 which is transacted at EV/planted area of RM80,200/ha based on our estimate. Although FGV also completed two acquisitions in the past one year, the IOICORP deal is more comparable as Unico-Desa’s average age profile is 13.0 years old (closer to NBPOL’s 10.8 years old) against FGV’s Pontian deal (16.0 years old) and Asia Plantations (2.7 years old). Although SIME’s offer of RM82,300/ha is at about a 3% premium to IOICORP’s previous offer, we deem this as fair as NBPOL owns a refinery with annual capacity of 300k MT in Liverpool, UK.

 We are positive on the deal as we expect SIME’s core earnings to increase by 4% in FY15E and 7% in FY16E from our current earnings base, assuming the deal is successful. Our estimate is higher than management’s guidance of a 4% to 5% increase (after financing cost) possibly due to our higher assumption of CPO prices at RM2,500/MT.

 Management guided that 80% of the amount will come from debt with the rest from internal resources. Assuming that SIME finally owns only 60% of NBPOL, net gearing is expected to increase from the current 0.24x to 0.35x. However, in the unlikely event that SIME control 100%, net gearing will then increase to 0.43x which we think is still manageable as it is still below the 0.50x threshold.

Outlook  This deal strengthened our view that the possibility of spin off exercise within SIME business divisions has significantly increased. This is positive as it should allow SIME’s valuation to rerate higher as it should emerge as a pure planter in the long run.

Forecast  Pending the actual materialization of the deal, we maintain FY15E Core Net Profit (CNP) of RM3.09b. We also maintained our FY16E CNP of RM3.22b. However, we expect SIME’s core earnings to increase by 4% in FY15E and 7% in FY16E from our current earnings base if the deal is successful.

Rating Maintain OUTPERFORM

 We think investors should now position ahead of SIME’s higher revaluation due to the sale or stake reduction in non-plantation divisions.

 The stock is also cum dividend 30.0 sen (subject to approval in the AGM).

Valuation  Maintain our TP of RM10.10 based on Sum-of-Parts (SoP). If the deal goes through, our TP should increase by 5% to RM10.60 in line with higher earnings for plantation division in our SOP valuation.

Risks to Our Call Lower-than-expected CPO prices or FFB yield.

 Lower-than-expected earnings from non-plantation divisions.

Source: Kenanga