Thursday 28 Mar 2024
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KUALA LUMPUR (June 15): Felda Global Venture Holdings Bhd (FGV)'s shares plunged 19 sen or 10.22% to historical low of RM1.67 in the morning trades today after the group's proposed greenfield sugar project in Indonesia for US$631.5 million (RM2.37 billion).
 
At 11.11am, the stock erased part of its losses tp trade at RM1.69, still down 17 sen or 9.14%. Some 13.55 million shares were seen having been traded. It was the fourth largest losers across the exchange.
 
FGV has lost RM12.385 billion or 65% of its market value since its June 2012 initial public offering (IPO). With the current price, it has a market capitalisation RM6.615 billion. 
 
Recall that FGV has on last Friday confirmed a report published on The Edge Financial Daily on last Friday that it was acquiring a 37% stake in PT Eagle High Plantations Tbk - the third largest plantation group listed in Jakarta - for US$631.5 million (RM2.37 billion) cash and 95.44 million new FGV shares, representing 2.55% of the enlarged and issued share capital of the group.
 
FGV said the proposed acquisitions are in line with its plan to transform FGV Group into one of the largest integrated plantation companies globally, through increasing land bank, improved age profile of crops, potential cost reductions and strategic long-term partnership with Rajawali Corporation - one of the most notable conglomerates in Indonesia.
 
In a note to client today, Affin Hwang Capital Research has reduced the stock to "Hold" from Buy with a lower target price (TP) of RM1.92 from RM2.13 previously. 
 
Despite noting the acquisition may positive to FGV in the long term, the firm however pointed out that high price paid, rise in financial leverage, potential short term earnings per share (EPS) dilution and absence of moratorium on new FGV shares to be issued may not be well received by short to medium term investors.
 
"Financing the total cash consideration with debt will raise the group's total-debt-to-equity ratio to 1.10 times," it added. 
 
Meanwhile, Public Investment Bank Bhd continued to rate FGV with a Neutral call and a TP of RM2.07.
 
The firm said it is concerned over the deals because the acquisition of a 37% stake in EHP will result in a change of controlling interest, which could potentially trigger a mandatory general offer (MGO) for the minority shareholders in EHP which will mean more financial resources being needed. 
 
"Secondly, if the MGO is unsuccessful, the acquisition will only see earnings being equity-accounted without the benefit of consolidating the company's balance sheet. 
 
"Failure to consolidate the strengths of EHP will not add significant value to the Group apart from associate contributions and establishing a good partnership with the Rajawali Group. 
 
"Lastly, the acquisition of greenfield land for sugar plantation will also require more capital expenditure to be injected, which could affect the Group's dividend payouts in the future," it added. 
 
Kenanga Investment Bank Research is maintaining its Underperform Call on FGV with lower TP to RM1.70 from RM1.86 previously based on 18.2 times forward price to earnings ratio (PER) from 20.5 times PER on average financial year 2015 (FY15) and financial year 2016 (FY16) EPS of 9.4 sen.
 
"In the near-term, we are neutral-to-negative on the potential deal, should it materialise, as we expect it to lower FY15 earnings after including loss of interest income. 
 
"Although the long-term impact should be positive due to the young tree age and diversification, the resulting high gearing is a major concern," it added. 
 
Kenanga said assuming an 80-20 debt-equity ratio, we estimate FY15 net gearing to rise to 0.8 times for a non-controlling stake and 1 times for a controlling stake, which is above management's comfortable ceiling level.
 
"Going forward, we expect asset divestment the most likely avenue to de-gear to a more manageable level, although we do not rule out the possibility of a cash call should a MTO is triggered," it added. 
 
(Notes: The Edge Research's fundamental score reflects a company's profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)
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