GENP announced its acquisition of 14.7k ha of plantation land for USD95.0m (RM408.4m) – not a surprise to us as management had previously noted their interest for wellpriced land bank. NEUTRAL short-term impact given minimal earnings contribution, but positive long-term on yield expansion. We tweak FY17-18E CNP by 0-1% to RM313-356m. Maintain MARKET PERFORM call with lower TP of RM11.00 as we update our SoP to include retail segment.

14.7k hectares (ha) buy in Kalimantan. Genting Plantations Berhad (“GENP”) announced that its 100%-owned indirect subsidiary, AsianIndo Holdings Pte Ltd (“AsianIndo”) has entered into conditional sales and purchase agreements with Lee Rubber Company Pte. Ltd. (“Lee Rubber”) for an 85% stake in PT Kharisma Inti Usaha (“PT KIU”) which holds the Hak Guna Usaha (“HGU” or land use rights) for 14.7k ha plantation land in Kalimantan Selatan, of which 12.9k ha is planted while 11.6k ha is matured area. The cost of acquisition is USD95.0m or RM408.4m. We gather that the acquisition is targeted for completion in 4Q17.

Overall neutral effect. The move does not come as a surprise as management has previously noted its willingness to acquire well-priced land bank. Valuations wise, we find the pricing as lower than average, with cost/ha of USD7.4k (RM31.7k) lower than the average Indonesian planted area cost of RM40.0k/ha. Note that the purchase price includes loans of USD71.6m (RM307.9m) which will be assumed by GENP postacquisition. On the earnings side, after accounting for additional interest cost and minority interest, we expect the acquisition to be earnings neutral but positive in the long-run, as 2016 FFB yield of 8.2 metric tons (MT)/ha indicates young average age, which should improve in the next 2-3 years. As for balance sheet impact, with GENP’s substantial cash reserves of RM1.26b as of 1Q17, we expect GENP to fund the transaction without cash calls. However, the additional debt would increase FY17-18E net gearing from 0.27x to 0.35x

Slight adjustment to FY17-18E CNP of 0-1% to RM313-356m. We expect only minimal additional earnings in FY18E as increased top-line is offset by higher interest cost and minority interest payments.

Maintain MARKET PERFORM with lower TP of RM11.00 (from RM12.40) as we update our Sum-of-Parts valuation to add on the Premium Outlets segment’s retail contribution, while also imputing a 15% conglomerate discount. We also update our Plantations Fwd. PER to 23.5x (from 26.0x) to reflect the latest average valuation for large-cap integrated planters as GENP enters the downstream market with its new refinery in Lahad Datu. Meanwhile, we roll forward our valuation base year to FY18 (from average FY17-18E). We remain neutral on GENP. For the Plantation business, we expect stronger Upstream performance on production recovery to be offset by lacklustre Downstream contribution due to limited biodiesel demand and tough refining margins. Meanwhile for the property side, property demand in Johor remains soft. However, Premium Outlets earnings should be offset by higher contributions from the new Genting Premium Outlets which began operations in mid-2Q17.

Source: Kenanga Research - 21 Aug 2017