Ta Ann Holdings Berhad (TAANN) has entered into three share sale agreements to fully acquire Agrogreen Ventures Sdn. Bhd. which owns 5,280 hectares (ha) of plantation land in Sarawak. We are positive on the deal given the young average age (2.9 years), while the increase in FY17E gearing to 0.4x (0.2x) remains manageable. No change to our FY17-18E CNP of RM101- 109m. We maintain OUTPERFORM on TAANN with an unchanged TP of RM3.94.

Sarawak brownfield acquisition. TAANN announced that it has entered into three conditional share sale agreements (SSA) to acquire 100% of Agrogreen Ventures Sdn. Bhd. (Agrogreen) for RM211.1m (please refer to details overleaf). We gather that Agrogreen holds the title to 5,280 hectares (ha) of plantation land in Sampadi and Lundu, Sarawak of which 5,090 ha is planted area. Note that the acquisition is conditional upon the successful completion of all three SSA as well as due diligence and approval of lending facilities.

A positive surprise. While the acquisition comes as a surprise, we are positive on the long-term impact given the very young tree age of c.2.9 years old. The acquisition will increase TAANN’s total land bank by 8%, which will remain entirely based in Sarawak. Valuations-wise, we calculate a price of RM41.5k/ha which we deem reasonable as it is in line with recent Sarawak palm oil land transactions valued at RM37-45k/ha. Assuming the transaction is 80%-20% debt-equity funded, we estimate FY17 net gearing to increase to 0.4x (from 0.2x). However, we deem this as fairly manageable with gearing remaining below 0.5x with an interest coverage ratio of 6.1x. We note a potential litigation risk due to an existing native customary rights (NCR) claim affecting the proposed acquisition. However, management is optimistic on the outcome having studied the nature of the claim and consulting the company’s solicitors. Management believes the potential benefits of the acquisition “outweigh the litigation risk”.

Minimal near-term impact. As the acquisition is expected to be completed in 1H17, we expect to see only a slight bump to FY16- 17E FFB production to 12-9% (from 12-8%). Earnings-wise, we expect the additional production income to be offset by interest cost. As a result, we maintain our FY16-17E CNP forecast at RM101-109m.

Maintain OUTPERFORM and TP of RM3.94 based on unchanged Fwd. PER of 16.0x applied to FY17E EPS of 24.6 sen. Our Fwd. PER of 16.0x is based on +0.5SD valuation basis, which we believe is justified by TAANN’s above-average FY16E FFB growth of 12% compared to the sector average of +2%. We expect the acquisition to support long-term FFB production growth, while in the near-term, earnings should improve on seasonally stronger FFB production, supportive CPO prices, and stabilizing timber prices in 2H16.

Source: Kenanga Research - 25 Oct 2016