MARKET DEVELOPMENT
Analysts Positive on Sime Darby's NBPOL Buy
Analysts Positive on Sime Darby's NBPOL Buy
13/10/2014 (The Sun Daily) - Analysts are positive on Sime Darby Plantation Sdn Bhd's proposal to acquire all shares in New Britain Palm Oil Ltd (NBPOL) for a cash consideration of GBP1.07 billion or RM5.63 billion as it would be value enhancing for the conglomerate in the long term.
MIDF Research said the proposed deal is likely to go through as the offer has gained strong support from Papua New Guinea's (PNG) government and the independent directors of NBPOL.
"Assuming that the proposed acquisition is to be completed by end of December 2014, this will increase Sime Darby's FY15 earnings by 4% (assuming base case of 51% stake in NBPOL)," it said in a research note last Friday.
It said that the offer price of GBP7.15 per share is fair, although it represents a premium of 85% to NBPOL's last closing price on Oct 8, due to the quality of NBPOL's assets which has made it one of the best performing palm oil companies in the world.
NBPOL owns a total landbank of 135,000ha of which 80,000ha is planted with oil palm. It also has 12 mills with a combined processing capacity of 630MT fresh fruit bunches (FFB) per hour, two refineries, young palm age profile of 10.8 years on average, good FFB yield of 23.5MT to 25MT per ha and 100% sourcing of certified segregated palm oil.
The total purchase consideration of RM5.63 billion will be financed by 80% external borrowings and 20% internal cash resources. At its current net gearing level of 0.21 times, MIDF said Sime Darby is able to increase its borrowings without jeopardising its credit risk.
"Due to the good prospects of NBPOL's business and positive contribution earnings to Sime Darby, we are positive on the proposed acquisition. However, as a conglomerate, weaker performance from other core businesses, specifically the energy and utilities, industrial and motor, as well as existing plantation divisions, poses risk to the overall group's performances," it added.
MIDF maintained its neutral call and target price of RM9.70 per share on Sime Darby due to the risk that the deal might be delayed or fall through.
Kenanga Research is also positive on the deal based on the expectation of Sime Darby's core earnings to increase by 4% in FY15 and 7% in FY16 if the deal goes through.
"Valuation wise, the enterprise value/planted area works out to be RM82,300 per ha which we think is fair. In our view, 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 ha based on our estimate.
"Although Sime Darby's offer of RM82,300 per ha 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 MT in Liverpool, UK," it said.
Kenanga maintained its outperform call and target price of RM10.10 and expects its target price to increase by 5% to RM10.60 if the deal goes through, in line with higher earnings for plantation division.
"This deal strengthened our view that the possibility of spin off exercise within Sime Darby's business divisions has significantly increased. This is positive as it should allow Sime Darby's valuation to re-rate higher as it should emerge as a pure planter in the long run," it added.
Meanwhile, Maybank Investment Bank (Maybank IB) Research expects neutral-to-slight negative earnings impact in the short term if the deal is successful but is positive in the long-term as PNG opens up a new market and provides future expansion opportunities for the group.
"With Indonesia proposing new rules to cap foreign ownership limit going forward, there is an obvious need for Sime Darby to diversify its geographical exposure and the Ebola crisis in Africa is likely to set Sime Darby's Liberian operation back by at least two years, in our view," it said.
In addition, Kulim (Malaysia) Bhd's willingness to sell its 49% stake in NBPOL presents a rare opportunity for Sime Darby to acquire quality brownfield assets.
Financially, Maybank IB Research is short term neutral to slight negative given the premium to secure a controlling stake in NBPOL. Based on its estimate, the near-term incremental impact to the group's bottom line is likely to be negligible at less than 1%.
"Overall, we believe the premium offered to take NBPOL private is justified but Sime Darby will have to brace itself for short term pain financially in return for long term gain. The financial pain could be compounded if CPO price do not recover back to RM2,600 per MT in a sustainable fashion over the next one to two years," it said.
It maintained its buy call and target price of RM10.20 on the stock.
Sime Darby shares closed 0.22% lower at RM9.08 with a total of 4,754,800 shares traded while Kulim shares closed 4.62% higher at RM3.40 with a total of 4,234,500 shares traded last Friday.
MIDF Research said the proposed deal is likely to go through as the offer has gained strong support from Papua New Guinea's (PNG) government and the independent directors of NBPOL.
"Assuming that the proposed acquisition is to be completed by end of December 2014, this will increase Sime Darby's FY15 earnings by 4% (assuming base case of 51% stake in NBPOL)," it said in a research note last Friday.
It said that the offer price of GBP7.15 per share is fair, although it represents a premium of 85% to NBPOL's last closing price on Oct 8, due to the quality of NBPOL's assets which has made it one of the best performing palm oil companies in the world.
NBPOL owns a total landbank of 135,000ha of which 80,000ha is planted with oil palm. It also has 12 mills with a combined processing capacity of 630MT fresh fruit bunches (FFB) per hour, two refineries, young palm age profile of 10.8 years on average, good FFB yield of 23.5MT to 25MT per ha and 100% sourcing of certified segregated palm oil.
The total purchase consideration of RM5.63 billion will be financed by 80% external borrowings and 20% internal cash resources. At its current net gearing level of 0.21 times, MIDF said Sime Darby is able to increase its borrowings without jeopardising its credit risk.
"Due to the good prospects of NBPOL's business and positive contribution earnings to Sime Darby, we are positive on the proposed acquisition. However, as a conglomerate, weaker performance from other core businesses, specifically the energy and utilities, industrial and motor, as well as existing plantation divisions, poses risk to the overall group's performances," it added.
MIDF maintained its neutral call and target price of RM9.70 per share on Sime Darby due to the risk that the deal might be delayed or fall through.
Kenanga Research is also positive on the deal based on the expectation of Sime Darby's core earnings to increase by 4% in FY15 and 7% in FY16 if the deal goes through.
"Valuation wise, the enterprise value/planted area works out to be RM82,300 per ha which we think is fair. In our view, 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 ha based on our estimate.
"Although Sime Darby's offer of RM82,300 per ha 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 MT in Liverpool, UK," it said.
Kenanga maintained its outperform call and target price of RM10.10 and expects its target price to increase by 5% to RM10.60 if the deal goes through, in line with higher earnings for plantation division.
"This deal strengthened our view that the possibility of spin off exercise within Sime Darby's business divisions has significantly increased. This is positive as it should allow Sime Darby's valuation to re-rate higher as it should emerge as a pure planter in the long run," it added.
Meanwhile, Maybank Investment Bank (Maybank IB) Research expects neutral-to-slight negative earnings impact in the short term if the deal is successful but is positive in the long-term as PNG opens up a new market and provides future expansion opportunities for the group.
"With Indonesia proposing new rules to cap foreign ownership limit going forward, there is an obvious need for Sime Darby to diversify its geographical exposure and the Ebola crisis in Africa is likely to set Sime Darby's Liberian operation back by at least two years, in our view," it said.
In addition, Kulim (Malaysia) Bhd's willingness to sell its 49% stake in NBPOL presents a rare opportunity for Sime Darby to acquire quality brownfield assets.
Financially, Maybank IB Research is short term neutral to slight negative given the premium to secure a controlling stake in NBPOL. Based on its estimate, the near-term incremental impact to the group's bottom line is likely to be negligible at less than 1%.
"Overall, we believe the premium offered to take NBPOL private is justified but Sime Darby will have to brace itself for short term pain financially in return for long term gain. The financial pain could be compounded if CPO price do not recover back to RM2,600 per MT in a sustainable fashion over the next one to two years," it said.
It maintained its buy call and target price of RM10.20 on the stock.
Sime Darby shares closed 0.22% lower at RM9.08 with a total of 4,754,800 shares traded while Kulim shares closed 4.62% higher at RM3.40 with a total of 4,234,500 shares traded last Friday.