News

According to The Edge (11-Dec-15), FELDA, which owns 34% of Felda Global Ventures (FGV), plans to buy 37% of PT Eagle High Plantations TBK (Eagle High) in a restructured deal where FGV will likely end up with <10% stake in Eagle High.

FGV had previously announced on 1-Dec-16 that possible different modes of investment could include “potential joint venture, off-take agreement or other form of mutually agreed collaborations”, and that the conclusive announcement would be made in 2016.

Comments

We are neutral-to-positive on this development. Valuations are still unclear as the updated pricing is yet to be announced. However, we expect FGV’s outlay to be substantially lower than the initial deal (RM2.62b cash and 95.4m new shares), which somewhat eases our concerns on FGV’s balance sheet if they take up the deal.

If FGV’s final Eagle High stake is indeed <10%, we expect minimal earnings impact going forward as FGV would receive only dividend income from Eagle High. Based on FY16E consensus DPS of IDR0.55/share, a 10% stake would imply dividend income of IDR1.74b, or RM533k or 0.2% of FY16E bottom-line.

Outlook

Although formal confirmation of the restructured deal reduces the uncertainty that had plagued FGV in the last few months, we think the weak short-term earnings outlook will continue to dampen share price performance.

Note that a <10% stake in Eagle High means that their young tree will not be consolidated into FGV’s own plantation age profile, which is relatively old (c.18 years) compared to other planters (c.11 years).

Meanwhile, the downstream segment should remain profitable going forward, post-disposal of their loss-making American assets, as refineries are now operating as toll manufacturers. However, margin risk is shifted into the Trading division, where volatile earnings are likely to persist.

Forecast

No change to our forecasts pending final details on the restructured deal with Eagle High.

Rating

Maintain UNDERPERFORM

Valuation

We up our TP to RM1.47 (from RM1.30) as we raise our Fwd. PER to 20.5x (previously 18.2x) applied to unchanged FY16E EPS of 7.2 sen. We increase our Fwd. PER to 20.5x based on -2.0SD valuation (previously -2.25SD) after removing the 0.25SD valuation discount which we had applied on the initial Eagle High deal due to concerns over share dilution and higher gearing. Although the final deal is yet to be announced, current newsflow seems to indicate that negotiations may be protracted. Hence we think the deal should not factor into FGV’s stock price for the near future.

However, despite increasing our TP, we maintain our UNDERPERFORM call as FGV’s share price had run up by 4.6% from the start of 4Q15, outperforming the sector average performance (+2.3%). Considering the soft FY15E outlook and potential 4Q15 earnings risk (if strong monsoon rains affect Peninsular Malaysia production) we believe an UNDERPERFORM call is warranted.

Risks to Our Call

Higher-than-expected CPO prices and FFB volume.

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

Source: Kenanga Research - 14 Dec 2015