News

Felda Global Ventures (FGV) has proposed the disposal of the entire issued and paid-up share capital of Twin Rivers Technology Holdings Enterprises de Transformation de Graines Oléagineuses du Québec Inc (TRT-ETGO) to Viterra Inc (Viterra) for CAD190.0m (or RM608.2m assuming CADMYR rate of 3.20).

We gather that the deal is targeted for completion in 4Q15, with an expected net gain on disposal of RM86.7m upon completion of the deal. The planned utilisation of proceeds is set out in Page 2 of this report.

Comments

We are positive on the proposed disposal as TRT-ETGO had been loss-making for the last three years, which reduced Downstream segment’s earnings by CAD33.3- 45.3m. As of 1H15, FGV’s Downstream segment reported LBT of RM7.2m. Post-disposal, we expect Downstream segment’s margins to turn positive as refining facilities have been converted to a toll manufacturing system. However, this should only impact earnings from FY16 onwards.

We believe the acquisition price at 1.3x PBV is fair despite being priced at a 33% discount to its peer average PBV of 1.9x, given its loss-making status currently.

Post-deal, assuming debt repayment of RM300m, we expect FGV’s net gearing to be reduced from 0.5x to 0.4x. Inclusive of their proposed Eagle High plantation acquisition, we expect final net gearing at 0.9x (which was previously estimated at 1.0x).

Outlook

Recall in the recent results announcement that management “expects to see no recovery in the market in the second half of the year” with no expectation of rebound in CPO prices. We concur with management as we expect FY15E CPO prices to average RM2,200/MT, close to year-to-date (YTD) average of RM2,191/MT.

However, we expect short-term refining margins to improve heading in the peak production season, while mid-term Downstream’s performance should improve following the disposal of TRT-ETGO.

Forecast

After imputing higher Downstream’s margins, we raise our FY16E CNP to RM286m (+11%). However, there is no change to our FY15E CNP.

Rating

Maintain MARKET PERFORM

Upside is limited on weak CPO price sentiment. However, downside is also limited in view of its share price trading below FY15E Book Value (RM1.77/share).

Valuation

TP upgraded to RM1.30 (from RM1.24) based on an unchanged 18.2x Fwd. PER on higher average FY15- 16E Core EPS of 7.2 sen (from 6.8 sen). Our target PER is based on -2.25SD which we think is justified by the negative FFB growth outlook (-5% YoY to 4.72m MT) and concerns on potential share dilution and increased gearing should its Eagle High purchase be completed.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected FFB growth.

Source: Kenanga Research - 28 Aug 2015