07/08/2012 (The Star) -  CIMB Research, which initiated coverage on Felda Global Ventures Holdings Bhd (FGVH), has a neutral call and RM5.05 target price (based on a 10% discount to sum-of-parts) on the plantation company.

The research house said FGVH offered growth prospects given the improving efficiency at its estates, the turnaround of its overseas assets and merger and acquisition (M&As) activities.

However, it noted that this was already reflected in the current share price as valuations were in line with peers.

“We start coverage on the stock with a neutral call as current valuations, which are in line with peers, are already fairly priced in the group’s earnings potential. We would turn more positive on the group if it is successful in its plans to acquire earnings-accretive M&As,” it said.

A worker collects oil palm fruits at Felda Sungai Tengi Selatan. - Reuters

“The group’s dominant position in the palm oil space provides it with better economies of scale. There are plans to expand its agri-business to Asean and Africa and build its downstream value-add. We expect the group to leverage its links with the Government in its pursuit of overseas M&As,” it said.

CIMB Research said FGVH was keen to acquire existing planted and unplanted estates in South-East Asia and Africa to expand its revenue and earnings base.

Oil palm will remain the dominant crop though there are plans to expand its rubber exposure to complement its palm oil business.

FGV plans to plant rubber trees in areas where palm oil cultivation is unsuitable. The group aims to raise its rubber plantation landbank from 10,308ha currently to 30,000ha.

“In pursuing M&As, FGVH can leverage its ties with Felda which has a strong reputation in the global market. In the sugar division, there are plans to raise domestic refining capacity and look for overseas expansion opportunities for its refining business. The expansion plan will enable the group to manage its capital better and grow its earnings base and revenue. Successful acquisition of planted estates at attractive valuations would be earnings accretive to the group,” CIMB Research said.

FGVH also intends to grow its downstream capabilities and market access in order to gain better visibility on product flows and enhance the margins of its upstream division. It plans to expand its downstream segment through the acquisition of refinery assets, consumer packed plants and bulking facilities where the group has limited operations.

“We are more positive on the group’s plans to seek partnerships to allow it to gain distribution networks and raise the sale of value-added products in key markets. We are less optimistic on its plans to raise its refining capacity as we think there may be a global refining margin squeeze in the next few years due to rapid expansion of downstream capacity in Indonesia. This may depress global refining margins but could provide opportunities for the group to penetrate key markets during the downturn,” CIMB Research said.

CIMB Research pointed out that there was scope to improve FGVH’s estate yields and oil extraction rates at its mills by replanting old trees with higher-yield seeds and consolidating the management of its estates.

“The group plans to improve its estates’ age profile over the next five years through more aggressive replanting. Plans are also underway to merge the management of its smaller estates to reduce costs.

“We estimate every one tonne per ha gain in fresh fruits bunches yields would add 6% to its FY13 net profit forecast,” it added.

The research house also said FGVH’s main strength was its large-scale and integrated palm oil operations, which provide FGVH with “better economies of scale” than its smaller peers.

CIMB Research said FGVH associates’ control 17% of Malaysia’s crude palm oil (CPO) output, giving it better bargaining power in the sale of its products.

FGVH’s integrated palm oil model also allows it to capture value add at every point of the palm oil value chain. Its estates are fairly efficient, generating a yield of 19.9 tonnes per ha although 16.9% of the estates have been in existence for more than 25 years.

CIMB Research also said FGVH’s strong connection with Felda provides the latter with an upper hand when vying for overseas plantation and downstream assets.

“The key weakness of FGVH is that 53% of its estates are above 21 years and are due for replanting in the next few years. Also, FGVH could lose control of the Felda-leased land if Felda decides not to renew the leases. The profitability of its plantation business is lower than its peers as the group needs to pay leases of around RM500mil to RM550mil a year to Felda for the estates and its replanting costs are higher than its peers in Malaysia,” CIMB Research pointed out.

FGVH’s Malaysian refining businesses is also facing stiff competition from Indonesian refiners.