Felda Global Ventures Holdings Bhd
(June 25, RM1.72)
Maintain reduce with an unchanged target price of RM1.69: Felda Global Ventures (FGV) and PT Rajawali Capita hosted an analysts’ briefing on FGV’s proposal to acquire a 37% stake in PT Eagle High Plantations Tbk (EHP) for US$680 million (RM2.56 billion) and a 95% stake in Rajawali’s sugar project for US$67 million cash. The key takeaways from the briefing were: i) FGV said it used a combination of discounted cash flow and enterprise value per hectare (EV/ha) valuations to arrive at the acquisition price for EHP (US$680 million, or 775 rupiah [22 sen] per share or EV/ha of US$17,400); ii) Rajawali believes the selling price is attractive for FGV because few plantation companies with over 100,000ha of estates are willing to sell a 37% stake; iii) FGV said there is a possibility that it may control EHP in future; and iv) both parties believe they can derive synergies by collaborating on trading of EHP’s crude palm oil and downstream venture.

We remain negative on the acquisition following the briefing as we are of the view that the potential synergies from the deal in the form of potential downstream expansion and collaboration will not be sufficient to outweigh our concerns. We continue to believe that the acquisition price for EHP, which is at a premium of 85% to its current share price, is too high and the acquisition would be earnings and cash flow dilutive for FGV. FGV will not have control over EHP, and we are of the view that this deal is not comparable with past transactions where the buyers gain full control of the estates. We are also negative on the plans to venture into downstream value-add processing in Indonesia as it is a highly competitive industry, and the group has little competitive advantage against other larger and more established palm oil players with strong distribution networks. — CIMB Research, June 25

This article first appeared in The Edge Financial Daily, on June 26, 2015.