Proposes to acquire Chinese refining facility. Felda Global Ventures (FGV) has entered into a conditional agreement to acquire Felda IFFCO South China Ltd (FISC) from Felda Iffco S/B (FIS) for a total purchase consideration of CNY320m (MYR172m). FISC operates the second largest fractionation capacity (930,000 tonnes p.a.) and storage tank capacity (170,000 tonnes) in South China, as well as a refinery (630,000 tonnes p.a.) which ranks as the third-largest in South China. The facility spans 65,000 sq m. The acquisition is aimed at enhancing FGV’s downstream capabilities to support future expansion initiatives in China. The refining facility is strategically located close to Port Xinsha, which is the most active trading region in South China. We believe this acquisition is also aimed at streamlining FGV’s organisational structure and earnings stream, given that FIS is a joint venture between FGV’s subsidiary, Felda Holdings and IFFCO Holdings Limited. The proposed acquisition is expected to be completed by the first quarter of 2015.

Pricing seems reasonable on an EV/tonne basis. In terms of pricing, FGV is paying an EV of MYR270/tonne, which is at approximately a 10% discount to the replacement cost for a new refinery. We believe the discount is reasonable, given that this is not a brand new refinery and has been running for a few years already. No details were given as to the profitability of this facility, although we note that in previous quarters, the entire FIS unit was not profitable.   

Maintain NEUTRAL. We make no changes to our earnings forecasts and SOP-based TP of MYR3.68. We believe FGV’s outlook should remain unexciting unless it is able to boost earnings via earnings-accretive acquisitions and extract synergy from its previous acquisitions. In terms of earnings sensitivity to CPO prices, every MYR100/tonne change in CPO price could affect FGV’searnings by 4-6% per annum.