News Felda Global Ventures (FGV) has announced that it is acquiring the entire equity stake of Felda IFFCO South China Ltd (FISC) from Felda IFFCO Sdn Bhd (FISB) for RMB320m (or RM172m assuming RMB/MYR rate of 0.54).
We gather that FGV currently owns 50% of FISB. Accordingly, FGV’s effective stake in FISC will be increased from 50% to 100% after this deal. The previous 50% effective stake is via FISB (50% owned) which in turn own 100% stake in FISC. After this deal, FGV will own 100% of FISC directly.
Comments We are neutral on this corporate exercise as FGV’s downstream earnings track record is mixed. Although the division made a small profit of RM14.5m in 1H14, it was loss making in FY13 with Loss Before Tax of RM42.6m.
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 as well as FGV. We share the same view and believe that FGV’s plantation division performance is likely to be challenging in the coming 3Q14 results as CPO prices have declined 5% YoY.
However, the good news is that CPO prices have recovered recently to above RM2,300/MT which should result in better 4Q14 earnings.
Forecast We maintain our core earnings forecast for both FY14E (RM650m) and FY15E (RM713m). We are taking the conservative view as the earnings for the downstream division had been volatile historically.
Rating Maintain MARKET PERFORM
Upside is limited as CPO prices are still lower YoY 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 to Our Call Lower-than-expected CPO prices.
Lower-than-expected FFB growth.
Source: Kenanga
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