United Malacca Berhad (UMCCA) has entered into an agreement to acquire an effective 60% interest in PT Wana Rindang Lestari (WRL) which holds the license to 59.9k ha of greenfield production forest for RM30.3m. We are longterm positive on the earnings prospects but maintain our forecasts for now pending further management’s guidance on crop selection and prospects. Reiterate OUTPERFORM with unchanged TP of RM7.15.

Completing SPA on Sulawesi land. UMCCA announced that it has entered into a conditional sale and purchase agreement (SPA) with Dalvey Star Limited (Dalvey), Clifton Cove Pte Ltd (Clifton), PT Bintang Gemilang Permai (BGP) and PT Wana Rindang Lestari (WRL) to acquire 100% equity interest in Clifton which post-SPA, will hold an effective 60% interest in WRL, for USD7.2m (RM30.3m). WRL holds the “Izin Usaha Pemanfaatan Hasil Hutan Kayu Pada Hutan Tanaman Industri” (HTI) license over 59.9k hectares (ha) of which c.40.1k ha are plantable while the remaining 19.8k ha are unplantable. The management is also licensed to plant non-palm oil crops including stevia, coconut, cocoa and coffee in the area. We gather that an additional estimated financial commitment of c.RM240m for the next 10 years would be incurred for development and planting expense of the land.

Long-awaited diversification. We are positive on the news as the diversification of UMCCA’s crop base should reduce earnings volatility arising from the price fluctuations of palm oil, while the JV would more than double existing plantation land bank to c.109k ha (+1.2x). While comparable transactions are limited, we note that the implied valuation of the land at USD12.0m (RM50.6m) appears inexpensive as it represents a substantial 50% discount to the estimated market value of USD24.0m (RM101.1m) with concession tenure of 60 years from Jun 2014 to Jun 2074. Note that the valuation is well below our initial estimated valuation of RM100-180m based on a per-hectare pricing of RM3-5k/ha based on palm oil greenfield pricing history, though this may reflect potentially lower revenue/ha potential at least in the early period of the project. Assuming a debt-asset ratio of 80-20, we estimate FY18-19E net gearing to rise marginally to 0.07-0.07x from 0.05-0.04x inclusive of additional planting expenditure which remains comfortable in our view.

Maintaining earnings outlook pending management guidance. While we expect the JV to be long-term positive, we maintain our earnings expectations for now pending further management’s guidance on planting plans and yield expectations for the new area. With the transaction slated for completion in 1QCY18, we expect minimal earnings impact in FY18 while FY19 may see positive revenue contributions but limited earnings impact as contribution from stevia crop (the shortest maturing among planned crops at c.3 months) would likely offset the additional operating cost of the new area.

Maintain OUTPERFORM with unchanged TP of RM7.15 based on unchanged Fwd. PER of 20.4x applied to unchanged CY18E EPS of 35.0 sen. Our Fwd. PER of 20.4x is based on +0.5SD valuation which we deem fair due to UMCCA’s above-average FFB growth forecast. We are also long-term positive on UMCCA’s young average tree age, continued production and cost efficiency measures and crop diversification plans, which should reduce earnings volatility from palm oil prices.

Source: Kenanga Research - 19 Oct 2017