Media sources reported that Felda Global Ventures (FGV)’s major shareholder Felda is considering the return of land leased to FGV. While the news is earnings negative considering the leased land comprised a vast proportion of FGV’s current land bank, the compensation for termination could be used to acquire new plantation assets. Maintain MARKET PERFORM with an unchanged TP of RM2.10, pending further details from management.

Felda seeks return of leased area? On Apr-29, The Star reported that Felda Global Ventures (FGV)’s major shareholder, Felda, is “said to be seeking the return of the land that is currently leased out to and managed by FGV because it feels that it can extract higher returns”, as well as exploring “reducing its stake in FGV” to third parties. In a separate article, The Star noted that FGV could be entitled to “a sizeable compensation for relinquishing its rights to manage the land bank” based on loss of future profits.

Near-term negative, long-term opportunities. We view that should the move materialize, FGV operations would be significantly affected considering that it is currently leasing c.355k ha from Felda, making up a massive 80% of its group’s land bank. We expect that the savings from the termination of Land Lease Agreement (LLA) payments of c.RM300m will not offset the substantial revenue decline of c.10-15% (c.RM1.5-2.0b) arising from the drop in planted area. However, should FGV receive compensation for the early termination of the LLA, the company could be able to acquire new areas with more favourable age profile, thus avoiding the significant replanting efforts on the older leased area which we gather costs c.RM200m for about 15.0k hectares annually. However, with the increasing scarcity of sizable land banks, we expect any possible acquisitions to take time to materialize.

Maintain FY17-18E CNP at RM95-120m. Given that the news appears to be only at preliminary discussion stages, we maintain our earnings forecasts pending further confirmation and details from management.

Reiterate MARKET PERFORM on FGV with unchanged TP of RM2.10. With no change to earnings, we maintain our TP of RM2.10 based on 1.3x Fwd. PBV applied to FY17E BV/share of RM1.61. Our valuation basis of 1.3x is slightly under mean valuation basis (1.4x) given below-average production expectations (+5% vs. sector average of 8%). However, our valuation basis is higher than -0.5SD basis (1.15x) as we expect potential foreign partnerships to yield positive synergies, while media sources claiming prospective partners to be keen on an investment stake in FGV should buoy share price sentiment.

Source: Kenanga Research - 2 May 2017