FELDA has announced: (i) CSPAs for 13.88% stake in FGV at RM1.30, and (ii) proposed MO for all remaining FGV shares at RM1.30 upon CSPAs becoming unconditional. Despite discount to IPO valuation on PBV basis, we deem the offer price as fair (representing FY21E PBV of 1.1x) given: (i) deteriorating ROE and ROA, (ii) net gearing of 0.8x (vs. net cash during IPO), and (iii) it is in line with peers’ average and FGV’s 3-year mean PBV valuation. On PER valuation, the offer price implies FY21E PER of 18.5x (5% premium to IPO), while consensus’ estimate implies 81% premium. ACCEPT OFFER.

Cash offer of RM1.30 per FGV share. Yesterday, FELDA announced in a press notice the following: (i) conditional share purchase agreements (CSPAs) with KWAP and Urusharta Jamaah for the collective acquisition of 13.88% equity interest in FGV for RM1.30/share, and (ii) proposed mandatory takeover offer (MO) for all remaining FGV shares also at RM1.30/share. After completion of the CSPAs, FELDA will in aggregate control 52.29% of FGV (KPF: 4.75%; based on Bloomberg), triggering the MO.

Conditions. The completion of the CSPAs is conditional on: (i) FELDA receiving and accepting a letter of offer/commitment to finance the proposed acquisition and the proposed mandatory takeover offer, and (ii) confirmation from FELDA’s financier/arranger that such financing is available for utilization/drawdown. Upon the CSPAs becoming unconditional, FELDA will serve the notice of MO to FGV’s Board of Directors.

ACCEPT OFFER; Fair price. Despite the mind-boggling gap between the offer price (RM1.30) and FGV’s IPO listing price of RM4.55/share (PER of 17.6x; PBV of 3.0x), we think it is fair. The offer price implies FY21E PBV of 1.1x (64% discount to IPO valuation), which better reflects FGV’s current prospect, given that FGV is a pale shadow of its former self. FGV’s ROE and ROA have deteriorated to c.5% and c.1% for FY20E (from average 15% and 6% in FY11- 12), respectively, and was even loss-making for the past two years. Considering that the company has been less efficient in using its assets, it is only right that investors would ascribe a lower value to FGV’s assets. FGV’s financial position was also stronger back then, with a net cash/share position (excl. LLA) of RM0.89 (vs. net gearing of c.0.8x currently). From a PER perspective, the offer price implies FY21E PER of 18.5x (5% premium to IPO PER), potentially due to current high CPO price environment. Note that consensus earnings estimate implies FY21E PER of 32x (81% premium).

Post announcement, we made no changes to our earnings estimate.

ACCEPT OFFER. We deem the offer price of RM1.30/share to be fair as per our abovementioned points. FY21E PBV of 1.1x reflects its 3-year mean valuation, which is also in line with its peers’ average. This is also in view of downside bias to CPO prices. The steep decline in CPO futures curve implies >RM800/MT downside by the end of 2021, justifying mean valuations. Our previous TP is RM1.25 based on FY21E PBV of 1.0x, with MP rating.

Source: Kenanga Research - 9 Dec 2020