Sime Darby Bhd
(Oct 10, RM9.08)
Maintain outperform with target price of RM10.10: Sime Darby has announced that it is making a general offer in cash for all the issued and to be issued shares in New Britain Palm Oil Ltd (NBPOL) at £7.15 (RM37.43)per share. The transaction values NBPOL at €1.07 billion.

We gather that NBPOL owns a total land bank of 134,611ha, out of which 79,885ha (59%) has been planted with palm oil. The average age of the estate is 10.8 years, close to the prime age of 10 years. If the deal is successful, Sime is expected to increase its planted oil palm land bank by 15% to 613,021ha. Another 9,282ha (7%) are used for grazing pasture, 7,718ha (6%) for sugar cane and other areas measure 37,727ha (28%). About 22,000ha out of the 37,727ha are plantable.

The enterprise value (EV)/planted area works out to RM82,300 per hectare which we think is fair. The most comparable deal is IOI Corp’s acquisition of Unico-Desa Plantation in October 2013 which was transacted at EV/planted area of RM80,200 per hectare based on our estimate. Although Felda Global Ventures Holdings Bhd (FGV) also completed two acquisitions in the past year, the IOI Corp deal is more comparable as Unico-Desa Plantation average age profile is 13 years (closer to NBPOL’s 10.8 years) against FGV’s Pontian deal (16 years old) and Asian Plantations Ltd (2.7 years old). Although Sime’s offer of RM82,300 per hectare is at about a 3% premium to IOI Corp’s previous offer, we deem this as fair as NBPOL owns a refinery with annual capacity of 300,000 tonnes in Liverpool, England.

We are positive about the deal as we estimate Sime’s core earnings to increase by 4% in financial year 2015 (FY15E) and 7% in FY16E from our current earnings base, assuming the deal is successful. Our estimate is higher than management’s guidance of a 4% to 5% increase (after financing cost) possibly due to our higher assumption of crude palm oil (CPO) prices at RM2,500 per tonne.

Pending the actual materialisation of the deal, we maintain FY15E core net profit (CNP) of RM3.09 billion. We also maintain our FY16E CNP of RM3.22 billion. However, we expect Sime’s core earnings to increase by 4% in FY15E and 7% in FY16E from our current earnings base if the deal is successful.

We think investors should now position ahead of Sime’s higher revaluation due to the sale or stake reduction in non-plantation divisions.  — Kenanga Research, Oct 10

This article first appeared in The Edge Financial Daily, on October 13, 2014.