News

Felda Global Ventures (FGV) has entered into a SPA with Golden Land Berhad (GLBHD) to acquire 836.1 hectares (ha) of plantation land and four subsidiary companies for a total purchase price of RM655.0m.

Note that the four companies consist of plantation land and one palm oil mill. Including the land purchase, we gather that FGV will be acquiring 9,813 ha of land of which 8,478 or 86% are planted.

Comments

We think the valuation of the deal at RM77,250/ha is fair as it is comparable to the historical valuation of RM75,000-RM80,000/ha for matured Sabah plantation estate. We gather that 86% of the GLBHD estates are matured with an estimated average tree age of 12.7 years, which is slightly lower than our estimated average tree age of 13.6 years for FGV.

Assuming 80-20 debt-equity funding, we expect FGV’s FY15 net gearing to increase to 0.45x from 0.37x. While net gearing remains below the comfort levels of 0.5x, as previously indicated by management, it means that there is less room to landbank via gearing. Any sizeable landbanking may require cash calls if the group wants to maintain its comfortable gearing level.

We are neutral to slightly positive on the deal. We expect the GLBHD estates to be earnings accretive should the deal be completed by 4Q15 as announced; we estimate an additional annualized earnings contribution of c.RM10.0m from the GLBHD estates going forward. Although the group’s average tree age is improved slightly, the earnings impact is not overly significant against their earnings base (1%-3% addition) while their net gearing has moved closer to the comfort ceiling level.

Outlook

Once the deal is completed, we expect FY15-16E FFB growth to improve to -5% and -3% (from -6% and -5% previously), respectively. However, group’s FFB production is still expected to decline YoY in the medium term.

Coupled with our FY15E CPO price of RM2,200/MT (-8% YoY), we think earnings upside for FGV could be limited.

Forecast

Due to our higher FFB production estimates as outlined above, we increase our FY15-16E CNP by 1-3% to RM308m-RM375m, respectively.

Rating

Maintain UNDERPERFORM We maintain our UNDERPERFORM call on FGV in view of the negative FFB growth against the sector average growth of 5%. We also think lacklustre CPO price expectations and FGV’s higher cost base (c.RM2,100/MT against the sector average of c.RM1,400/MT) may result in further earnings risks.

Valuation

We revise up our TP to RM1.92 (from RM1.88) based on an unchanged 20.5x PER on higher average FY15-16E core EPS of 9.4 sen (previously 9.2 sen). We think our valuation basis of -2.0SD is justified due to the negative FFB growth outlook and limited earnings upside.

Risks to Our Call

Higher-than-expected CPO prices and FFB volume.

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

Source: Kenanga Research - 9 Jun 2015