We left FGV’s briefing feeling a bit more positive. However, we continue to highlight  its  need to acquire immediately earnings-accretive assets, which  Asian  Plantations  is  not.  We  estimate  the  immediate  impact  to FGV’s  bottomline  would  be  a  negative  10-13%.  We  maintain  our  BUYcall  for  now,  but  highlight  that  we  are  reviewing  our  CPO  price assumptions and, therefore, recommendations soon. 

Key  highlights.  Felda Global  Ventures (FGV)’s  briefing explained  more about its recent acquisition proposals, namely its voluntary bid for Asian Plantations Ltd (APL).  APL’s landbank  is  24,621ha. Of this,  16,300ha  is planted  and  8,337ha matured  (end-July).  Another  3,700ha is  plantableand will be planted in 2015. The average age of the planted hectarage is 5.2  years while  2013 fresh fruit bunches (FFB) yield  was 7.8  tonnes/ha. About  50%  of  its  mature  hectarage  came  into  maturity  in  2004-2010while  the  remaining  50%  came  into  maturity  in  2013  and  2014. Management expects new maturity of 3,390ha in 2015, 3,207ha in 2016 and 4,137ha in 2017.  It  also said that no rehabilitation work was needed as the quality of planting was good. The main issue was maintenance, as it was possible that not enough fertiliser was applied previously due to APL’s tight cash  flow, although  this  is easily rectifiable. One of the main reasons for the losses  APL incurred  was the  high percentage of external fruit acquired (86% currently)  to service its 60 tonnes/hour CPO mill. This resulted  in  higher  costs  and  lower  oil  quality.  By  2016, as more  areas come into maturity, this is set to reduce to 46%. 

Reasonable  pricing.  Based  on  this  new  information,  and  after  taking into  account  APL’s  MYR448m  net  debt  and  deducting  the  CPO  mill’s value,  we  estimate  FGV’s  acquisition price  to  be  MYR50,800/plantable ha  –  still reasonable. Management expects APL to break  even by FY17, which is when the bulk of the previously planted areas would have come into maturity and the  percentage  of external fruit acquired would be less than its own crops.  FGV  hopes this acquisition  can  be completed within the next 1.5 months. 

Short-term  negative  earnings  impact  but  long-term  positive.  While we  are  a  bit  more  positive  on  this  proposal  now,  given  the  new information, we continue to highlight  FGV’s  need to acquire  immediately earnings-accretive  assets  –  this  is  not.  We  estimate  the  immediate impact  to  bottomline  would  be  a  negative  10-13%  after  taking  into account the interest income foregone. Yet, the longer-term impact should be positive. Maintain BUY for now but highlight that we are reviewing our CPO price assumptions and, therefore, recommendations soon.

Source: RHB