14/09/2012 (Borneo Post) - Sarawak Oil Palms Bhd’s (SOP) agreement to purchase of the remaining 40 per cent and 35 per cent equity interests in its own subsidiaries, SOP Beluru and SOP Kemena, has been viewed positively as the immature planted landbank will offer increased earnings in the years to come.

To recap, SOP’s major shareholder Shin Yang Holdings Sdn Bhd sold its equity in the said subsidiaries to the former for a combined cash consideration RM242.5 million.

SOP Beluru has a total planted area of 12,352 hectares (ha) with one to four-year old oil palm trees while most trees in SOP Kemena’s planted area of 9,974ha are between three and five years old.

In a research note, OSK Research Sdn Bhd (OSK Research) analyst Gan Jian Bo opined, “Despite the purchase being a related party transaction, we believe that SOP got a favourable deal with this purchase.

“The blended transaction price per ha is US$9,400 per ha, substantially cheaper than the valuation for TSH Resources Bhd’s (TSH) bid for Pontian United Plantations Bhd at an estimated US$16,000 to RM20,000 per ha, and similar to the fairly cheap US$9,250 per ha valuation that the Samling group is offering to privatise Glenealy Plantations Bhd (Glenealy).”

With regards to the choices of sale offers for comparative purposes, Gan pointed out to The Borneo Post that they were recent (in 2012) and in East Malaysia, with TSH’s in Sabah, while Glenealy’s estates are in both Sabah and Sarawak.

With reference to SOP’s estates, he continued, “Production from these two is still far from peaking given their very young tree age profiles but we expect output to increase organically as the trees mature over time.”

On the financial impact of the deal, he said as it was a cash transaction, the purchase would give rise to an incremental interest expense of RM4.4 million per year for the RM100 million that SOP would borrow to fund the purchase. The planter’s had a net debt position of RM42.8 million.

“With the trees still very young (and hence not as productive as fully mature ones), the estates are likely to simply break even at the moment. As such, minority interest reduction is likely to be minimal in FY13.”

“Over the next five years, however, SOP’s increased equity interest in its subsidiaries could save the company RM17.2 million a year in minority interest leakages, assuming a CPO price of RM3,000, 16-tonne fresh fruit bunch yield (since some of these trees will yet hit peak in five years’ time) and a 20 per cent net profit margin.”

The analyst had gathered that Beluru, being a largely immature estate, was loss-making while Kemena was marginally profitable.

As such, he marginally trimmed OSK Research’s FY12 and FY13 earnings estimates by 0.2 per cent and one per cent respectively, believing that that minority interest savings would start to kick in materially in FY14 when the trees further matured.

The fair value for the stock was lowered by 10sen to RM9.27 per share, based on a 13 times FY13 price earnings ratio.