This article first appeared in The Edge Financial Daily on February 23, 2018
KUALA LUMPUR: Shareholders of Kretam Holdings Bhd would have been jumping for joy to see the company’s share price climb to more than a 20-year high of 85.5 sen yesterday. However, it might not be the same for Hap Seng Plantations Bhd, having made a mandatory general offer (MGO) to buy Kretam shares at 92 sen apiece.
The MGO came after Hap Seng Plantations has proposed to buy a 55% stake in Kretam for RM1.18 billion.
Analysts said the acquisition appears to be pricey. The offer price of 92 sen per share is at a 62.5% premium over Kretam’s 12-month average of 56.6 sen.
“Our concern over the deal is [the] potential financial impact far outweighs potential synergies from an integration,” said CIMB analyst Ivy Ng in a note yesterday.
“We estimate that it is paying around RM97,000 enterprise value (EV) per ha, significantly higher than the implied EV per ha for its own and more profitable estates of RM53,000,” Ng added.
In terms of price-earnings ratio (PER), the proposed purchase price too implies a huge forward PER of 77 times, far exceeding the small-cap average of about 18 times, said Kenanga Research analyst Voon Yee Ping.
Besides acquiring it at a premium, the acquisition is also expected to weigh on Hap Seng Plantations’ balance sheet as it may fund the exercise through fresh borrowings, which could raise its net gearing up to one time from its net cash position.
Voon said this may “severely limit expansion capabilities of the company”, downgrading the rating on Hap Seng to “underperform” from “market perform” previously, with a lower target price of RM2.30, down from RM2.60.
In its Bursa Malaysia filing, Hap Seng Plantations said the purchase price is justifiable given that it is at a 5% discount to Kretam’s adjusted consolidated net assets of RM2.25 billion or 97 sen.
Analysts also warned that earnings contribution from Kretam would be more than offset by additional interest expenses incurred from the exercise. Voon said Kretam’s incremental earnings contribution of about RM45 million per year would “fail to offset” additional interest cost of about RM50 million to RM100 million per year, depending on the final acquired stake.
“We estimate the acquisition could dilute Hap Seng Plantations’ earnings by 44% for the financial year ending Dec 31, 2019 (FY19),” said Ng.
However, Affin Hwang Capital Research begs to differ, calling the acquisition “a good addition” to the company in the long run. “The premium could be justified considering the proximity of both estates, and hence the potential synergistic benefits and economies of scale that combined operations may benefit in the longer run,” said its analyst Nadia Aquidah.