Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on October 20, 2017

United Malacca Bhd
(Oct 19, RM6.55)
Reiterate outperform with an unchanged target price of RM7.15:
United Malacca Bhd has entered into an agreement to acquire an effective 60% interest in PT Wana Rindang Lestari (WRL), which holds the licence to 59,900ha of greenfield production forest, for RM30.3 million. We are long-term positive about the earnings prospects, but maintain our forecasts for now, pending management’s guidance on crop selection and prospects.

United Malacca has announced that it had entered into a conditional sale and purchase agreement (SPA) with Dalvey Star Ltd, Clifton Cove Pte Ltd, PT Bintang Gemilang Permai and WRL to acquire a 100% equity interest in Clifton which post-SPA will hold an effective 60% interest in WRL for US$7.2 million (RM30.3 million).

WRL holds the licence for over 59,900ha of which 40,100ha is plantable. The company is also licensed to plant non-oil palm crops, including stevia, coconut, cocoa and coffee, in the area. We gather that an additional estimated financial commitment of RM240 million for the next 10 years would be incurred for the development and planting expense of the land.

We are positive about the news as the diversification of United Malacca’s crop base should reduce earnings volatility arising from price fluctuation in palm oil, while the joint venture (JV) would more than double its existing plantation land bank to 109,000ha (+1.2 times). While comparable transactions are limited, we note that the implied valuation of the land at US$12 million appears inexpensive as it represents a substantial 50% discount to the estimated market value of US$24 million with a concession tenure of 60 years from June 2014 to June 2074.

The valuation is below our initial estimated valuation of RM100 million to RM180 million based on a pricing of RM3,000 to RM5,000 per ha based on palm oil greenfield pricing history, though this may reflect potentially lower revenue per ha, at least in the early period.

Assuming a debt-asset ratio of 80:20, we estimate that its financial year 2018 (FY18)-FY19 net gearing to rise marginally to 0.07 times-0.07 times from 0.05 times-0.04 times.

With the transaction slated for completion in the first quarter of 2018, we expect minimal earnings impact in FY18, while FY19 may see positive revenue contributions but limited earnings impact, as contributions from stevia (the shortest maturing at three months) would likely offset the additional operating cost of the new area.

We are also long-term positive about United Malacca’s young average tree age, continued production, cost-efficiency measures and crop diversification plans. — Kenanga Research, Oct 19

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