News

Following the trading suspension, Felda Global Ventures (FGV) announced that they have entered into a Heads of Agreement with Indonesian conglomerate Rajawali Corpora (Rajawali) whereby FGV proposes to: (i) acquire a 37% stake in PT Eagle High Plantations (EHP) for USD632m cash (RM2.37b) and 95.4m new FGV shares (equivalent to USD47m or RM177m at last closing price of RM1.86 and USD/MYR exchange rate of RM3.77), and (ii) acquire a 95% stake in Rajawali’s Papua sugar business for USD67m (RM249m).

The total transaction cost comes to c.USD699m (RM2.62b) cash and 95.4m new shares representing 2.6% of FGV’s enlarged share cap. We gather that the targeted completion of the deal is 4Q15. For more details see page 2.

Comments

We gather that the rationale behind the acquisition is to form a strategic partnership with Rajawali Corpora to provide a platform into the Indonesian market for palm oil and sugar products.

Based on EHP’s 2014 planted area of 151k ha, the valuation of the deal comes to c.USD4,200/planted ha (RM15.9k) which seems pricey, as we estimate that brownfield plantations in Indonesia are valued at USD3,000-3,500/planted ha. The acquisition price implies FY14 PBV of 3.6x and PER of 128.9x. Assuming EHP’s FY15-16E earnings growth at 15-20% (due to its young trees), the implied acquisition value would be 112.1x-93.4x; still expensive vis-à-vis FGV’s current FY15E PER of 22.0x. Note that the implied EHP valuation at RM6.92b is at a 72% premium from its market cap (c.RM4.02b).

Management did not provide a clear indication on whether the 37% stake in EHP will be a non-controlling or controlling stake. Should the potential acquisition be considered a controlling stake, this could trigger a Mandatory Tender Offer (MTO) for EHP. Although a controlling stake would improve FGV’s long-term fundamentals due to account consolidation and a lower tree age profile, we think that raising additional funds for a MTO could prove challenging. Refer to page 2 for further comparison on the non-controlling/controlling (assumed at 51%) stake impact.

Note that the sugar businesses to be acquired are still in the early greenfield stage with little public information available, hence we advise investors to take caution on this aspect.

Outlook

In the near-term, we are neutral-to-negative on the potential deal, should it materialise, as we expect it to lower FY15E earnings after including loss of interest income. Although the long-term impact should be positive due to the young tree age and diversification (the land is not subject to FGV’s Land Lease Agreement), the resulting high gearing is a major concern.

Assuming an 80-20 debt-equity ratio, we estimate FY15 net gearing to rise to 0.8x for a non-controlling stake and 1.0x for a controlling stake. This is above management’s comfortable ceiling level. Going forward, we expect asset divestment the most likely avenue to degear to a more manageable level, although we do not rule out the possibility of a cash call should a MTO is triggered.

Forecast

Maintained, pending approval from government & shareholders.

Rating

Maintain UNDERPERFORM We maintain our UNDERPERFORM call on FGV as regardless of the possible deal FGV faces headwinds on its negative FFB growth outlook and high cost structure compared to the sector average.

Valuation

We lower our TP to RM1.70 (from RM1.92) based on 18.2x Fwd. PER (from 20.5x PER) on average FY15-16E core EPS of 9.4 sen. We reduce our valuation basis to -2.25 SD (from -2.0SD) given: (i) our negative near-term view on the deal, (ii) potential share dilution, and (iii) concerns over FGV’s high gearing ratio should the deal materialise.

Risks to Our Call

Higher-than-expected CPO prices and FFB volume.

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

Source: Kenanga Research - 15 Jun 2015