News

Felda Global Ventures (FGV) announced that it has entered into two conditional sales and purchase agreements ("SPA 1" and "SPA 2") for the acquisition of 81.6m shares representing 55% stake in Zhong Ling Nutri-Oil Holdings Limited (Zhong Ling) from multiple vendors for a purchase consideration of RM976.3m.

We gather that Zhong Ling's subsidiaries are involved in the production, packaging and sale of peanut oil, other edible oils, packaged oils, chicken essence and flavoring.

Comments

We are cautiously optimistic on the acquisition as it should be earnings accretive to FGV after accounting for interest expense. Assuming 5% annual earnings growth, we estimate that the acquisition could increase FY16E CNP by 15% to RM299.3m. Valuations-wise, implied Fwd. PER of 8.4x compares favourably with other listed Chinese edible oil producers historically traded between 9.3x to 20.2x.

However, assuming 80-20 debt-equity funding, we expect FGV's FY16E gearing to rise to 59% from 44%, which is above previous guidance of comfortable net gearing below 50%.

Outlook

Despite a potentially earnings-accretive deal, the ongoing uncertainty over the Eagle High acquisition may weigh on investors' sentiment. Meanwhile, although rising CPO prices bode well for near-term earnings, we think the main margin risk comes from the Trading division where we expect to see volatile earnings.

Forecast

No change to our forecasts pending further details from management in the coming results briefing due 29-Feb-16.

Rating

UNDER REVIEW (from UNDERPERFORM)

Valuation

We place our UNDERPERFORM Call and TP (previously RM1.47) UNDER REVIEW pending clarity from management. However, assuming no surprises in the 4Q15 results, a 15% earnings upgrade due to this acquisition should result in a similarly higher FY16E EPS of 8.2 sen. Maintaining our Fwd. PER of 20.5x (-2.0SD valuation basis), this would result in a theoretical TP of RM1.68 and a MARKET PERFORM call on stronger earnings outlook.

Risks to Our Call

Higher-than-expected CPO prices and FFB volume.

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

Source: Kenanga Research - 29 Feb 2016