News

Felda Global Ventures (FGV) has terminated its proposed acquisition of Zhong Ling Nutril-Oil Holdings Limited (Zhong Ling) as the conditions precedent set out in SPA 1 and SPA 2 could not be fulfilled within the completion date (for details, refer to our Quick Bites report published 29-Feb).

Comments

We gather that the cancellation was mutual, given the difference in timing expectations. We are neutral on the cancellation of the deal. Although we expected the deal to be earnings accretive, it would have pushed FGV’s FY16E gearing beyond its comfortable 50% level.

Outlook

While the Zhong Ling acquisition has been called off, the Eagle High deal remains under discussion, which could continue to dampen investors’ sentiment. Meanwhile, despite rising CPO prices, we remain neutral on FGV’s earnings outlook as its Land Lease Agreement (LLA) payments will similarly rise, plus margin risk remains in its volatile Trading division.

Forecast

We reduce our FY16-17E CNP both by 3% to RM227-187m as we reversed out the estimated earnings contribution from the Zhong Ling acquisition.

Rating

Maintain UNDERPERFORM Earnings upside on rising CPO prices is limited by a negative FFB growth outlook, compared to the sector average of +6%.

Valuation

We lower our TP to RM1.28 (from RM1.32) post-earnings revision. Our Fwd. PER of 20.5x is maintained while Fwd. FY16E EPS is lowered to 6.3 sen (from 6.5 sen). Our Fwd. PER is based on an unchanged - 2.0SD which we believe is justified by FGV’s negative FFB growth, higher risk on its Trading division, and softer sentiment from the Eagle High deal.

Risks to Our Call

Higher-than-expected CPO prices and FFB volume.

Better-than-expected earnings from nonplantation divisions.

Source: Kenanga Research - 11 Apr 2016