GENP acquires of 22.0k ha of plantation land in Kalimantan Barat for USD42.2m (RM172.8m). We are not surprised as management has previously signalled its interest in further plantation acquisitions. Short-term, we are neutral on the deal given minimal immediate earnings contribution, while long-term, we are more positive on landbank expansion. Maintain our FY16-17E CNP at RM247-266m. No change to our UNDERPERFORM call with TP maintained at RM10.60.

Acquires 22.0k hectares (ha) in Kalimantan. Genting Plantations Berhad (“GENP”) announced that its 74% indirect subsidiary, Palmindo Holdings Pte Ltd (“Palmindo”) has entered into conditional sales and purchase agreements with a related party, GPCC, for the purchase of two 95% owned subsidiaries in Indonesia with the rights to develop PT Agro Abadi Cemerlang (“PT AAC”)’s 8.1k ha and PT Palma Agro Lestari Jaya (“PT PALJ”)’s 13.9k ha of plantation land in Kalimantan Barat, of which 3.9k ha in PT AAC is planted (refer overleaf for details of the transaction). The cost of the acquisition is USD42.2m (RM172.8m), or USD34.6m (RM141.7m) for PT AAC, and USD7.6m (RM31.2m) for PT PALJ.

Neutral on acquisition. We are not surprised by the move as management had already indicated that they were open to consider attractive plantation acquisitions. Valuations-wise, we believe the pricing is fair, as the cost/ha of PT AAC of USD9.4k/planted ha (RM38.6k/planted ha) is in line with the Indonesian average planted area cost of RM40k/planted ha. Meanwhile, for the greenfield PT PALJ area, the cost/ha of USD576/ha (RM2.4k/ha) is in line with the average greenfield cost of RM2.6k/ha. Note that the purchase price is subject to adjustment during the due diligence exercise, taking into consideration the size of land suitable for oil palm cultivation as well as all necessary licenses and permits.

Minimal earning impact. We are near-term neutral on the deal, as we gather that only 1.6k ha of the planted area is mature, hence immediate earnings contribution should be minimal. Long-term, we are more positive on acquisition of additional landbank, although with GENP’s sizeable unplanted area (>100k ha), we believe that full use of the acquired land could be a long way off. Given GENP’s hefty cash pile of RM1.51b as of 1Q16, we believe that GENP should be able to fund the transaction without any cash calls. However, we expect the acquisition to slightly increase FY16E net gearing from 0.36x to 0.40x.

Maintain FY16-17E CNP at RM247-268m as earnings contribution from the new area is offset by reduced interest income.

Maintain UNDERPERFORM with TP of RM10.60 based on Sum-of- Parts with Plantation Target PER unchanged at 26.0x, in line with mean valuation on GENP’s 3-year average PER. We believe this is fair, as GENP’s young Indonesian area should contribute to long-term FFB growth, despite headwinds from 2016 droughts slowing shortterm production prospects. However, we reiterate our UNDERPERFORM call on GENP since we are concerned on its sizable Indonesian unplanted area, when recent government moratoriums on planting on peat area, including concessions, could lead to potential reduction in plantable area, especially in Kalimantan. A lacklustre Johor property market outlook could also compound earnings risk.

Source: Kenanga Research - 28 Jun 2016