United Malacca Berhad (UMCCA) recently announced the completion of its 83% acquisition in PT Lifere Agro Kapuas (LAK) for RM285.0m. We recently caught up with UMCCA’s management to discuss the potential impact of the acquisition and came away with our positive long-term view intact as its young average tree age in Indonesia (3.3 years) should contribute to continued FFB growth over the next 8-10 years. We reiterate our OUTPERFORM call on UMCCA with a higher TP of RM7.50 (from RM7.05) based on unchanged Fwd. PER of 21.0x applied to higher CY16E EPS of 35.7 sen (from 33.6 sen) as we upgrade FY16-17E earnings by 3-8% on higher-than-expected maturing hectarage in CY16.

Recapping the LAK deal… Recall in our Results Note report published on 16- Dec-15, UMCCA had proposed to acquire an 83% stake in LAK from Lincoln Wilshire Investments Ltd. (Lincoln) for a total cash consideration of USD66.4m (RM285.0m). LAK holds the plantation license to 24.6k ha of plantation land, of which 10.4k ha is planted area, while the estimated plantable area is 17.1k ha. Of the existing planted area, 5.2k ha is LAK’s own planted area (“inti”) while the balance 5.1k ha area is allocated to smallholders (“plasma”). We believe the implied valuation of the deal at USD7.7k/planted ha (RM33.1k/planted ha) is fair, as we estimate Indonesian brownfield is valued at about RM30.0k/ha.Note that the LAK purchase was completed on 22-Jan-16, with UMCCA financing the deal through its own cash reserves and the first borrowings (USD50.0m) in its 105 year history. We expect full contribution from the acquisition in 4QFY16.

Higher-than-expected maturing hectarage to drive FY17E earnings. We gather that management expects 4.4k ha of its Indonesian area to reach maturity in CY16. This is higher than our initial assumption of 2.0k ha. We believe the Indonesian land is likely to drive mid-term earnings growth. FY16-17E Malaysian FFB growth is more modest at 6-4%. All-in, the new area will improve group FY16-17E FFB growth to 6-12%. As a result, we up our FY16-17E earnings by 3- 8% to RM53.3-82.2m.

Young age profile to ensure long-term FFB growth. With LAK’s young average tree age of only 3.3 years, we believe the Indonesian area will continue to contribute to consistent group FFB growth over the next 8-10 years. The LAK acquisition also improves UMCCA’s existing age profile, bringing down current average age from 9.7 years to 8.5 years. We expect peak production growth in the Indonesian area to kick in from CY20 onwards as plantings in CY12-13 hit prime production period (7-12 years), thus ensuring continued group FFB growth in the long-term.

Room for expansion. Management noted that the LAK acquisition has good long-term expansion potential in the upstream to midstream segments. We understand that in the upstream side, UMCCA plans to construct their own mill in FY17-18 to cater for their own production. We also gather that there are opportunities to expand land bank in the nearby area. Meanwhile, moving midstream, the LAK acquisition includes a refinery license, which UMCCA intends to utilise in the long-term. Overall, we believe that the LAK acquisition serves as a good starting point for UMCCA to build up its presence in Indonesia while diversifying the group earnings base with midstream expansion.

Maintain OUTPERFORM with higher TP of RM7.50 (from RM7.05).We reiterate our OUTPERFORM call with a higher TP of RM7.50 based on an unchanged Fwd. PER of 21.0x applied to higher CY16E EPS of 35.7 sen (from 33.6 sen). Our Fwd. PER of 21.0x is based on +0.5SD valuation which we believe is fair as UMCCA’s FY17E FFB growth prospect at 12% is well above the sector average (+6%). Furthermore, we believe UMCCA’s Indonesian expansion bodes well for mid-to-long-term earnings growth given its high quantum of maturing area, young average tree age, and space for up/midstream expansion.

Source: Kenanga Research - 12 Feb 2016