FGV is proposing to acquire a piece of land and four companies which collectively ow 8,478ha of planted estates in Sabah for MYR655m.Maintain SELL and MYR1.70 TP (11% downside). We are neutral on the acquisition, as while the pricing is a tad higher than the last two similar transactions in Sabah, we note that this is not likely to be immediately earnings-accretive, although we do not rule it out in the medium term.

• Acquiring brownfield land. Felda Global Ventures’ (FGV) subsidiary, Pontian United Plantations (PUP), has entered into a sale and purchase agreement (SPA) with Golden Land Bhd (GLB) to acquire a piece of land and is four subsidiary companies for MYR655m. GLB and its four subsidiary companies collectively own 8.478ha of planted palm oil estates in Beluran, Sabah, as well as a palm oil mill. FGV expects this acquisition to be completed by 4Q15.
• More expensive than PUP and Unico-Desa acquisitions. Assuming the mill is a 15-tonne/hour mill, we estimate the cost of FGV’s acquisitionto be MYR75,490/ha. This is slightly higher than what IOI Corp (IOI MK, NEUTRAL, TP: MYR4.40) paid for Unico-Desa’s brownfield land in Sabah of MYR73,400/ha and its own Pontian United Plantations acquisition at MYR74,765/ha, both in 2013. On a P/E basis, based on total FY14 net profit of MYR18.15m, FGV is paying a P/E of 36x. However, we believe that P/E may not be a relevant yardstick at this point, given that 28% of the landbank is still between ages of 0-9 years (see Figure 1). There were no details on the FFB yield or oil extraction rate (OER) of the estates and mill.
• No change to forecasts and recommendation. In terms of earnings impact, based on FY14 historical net profit, this acquisition would be close to a breakeven, assuming interest income foregone at a rate of 3%. However, assuming these estates are in good condition and are able to eventually produce an FFB yield in line with Sabah statestandards of 20-tonne/ha and OER of 29%, the acquisition P/E would come down to about 25x, and it would be slightly earnings-accretive, adding 1-2% to FGV’s total net profit. As such, we are relatively neutral on this acquisition. We retain our SOP-based TP of MYR1.70 and SELLrating. Catalysts include a positive change to FGV’s land lease liability calculation, more earnings-accretive acquisitions and synergy extraction from its previous acquisitions. We highlight that every MYR100/tonne change in CPO price could affect its earnings by 4-6% pa.