06/10/2012 (The Star) - The plunge in crude palm oil (CPO) prices will pressure Felda Global Ventures Holdings Bhd's (FGVH) earnings while recent news on mergers and acquisitions (M&As) is not seen as an immediate re-rating catalyst, analysts say.

OSK Research analyst Gan Jian Bo says the news of M&As does not come as a surprise as it was planned for with the initial public offering (IPO) proceeds.

He tells StarBizWeek that M&As will not be an immediate re-rating catalyst for FGVH's share price as it takes time to see any contribution to its earnings, adding that it will also be determined by whether greenfields or brownfields are being purchased.

“Brownfield purchases will see an immediate contribution to earnings, but they will come at a higher price,” he adds.

Another analyst concurs as the company is still “testing the water” at this point on the news of the planter seeking opportunities in Myanmar.

“It is still exploring the system and regulatory frameworks there, so that will not be a re-rating catalyst as of now,” she says.

FGVH announced it entered into a memorandum of understanding via its unit, Felda Global Ventures Plantations Sdn Bhd with Myanmar-based Pho La Min Trading Co Ltd on Sept 30 to explore business opportunities in rubber plantation and processing.

In a report released on Oct 2, Affin Investment Bank says it has also identified suitable areas in Myanmar for sugar cane and oil palm plantations.

“No timelines have been given for the sugar cane and oil palm ventures but the rubber plantation and rubber processing joint venture may be concluded in December or early next year,” the research house adds.

The research firm sees no impact from the joint venture on FGVH's profit for financial years ending Dec 31, 2012 to 2014 pending the setting up of the joint venture and details on the quantum of investment as well as commencement of rubber planting and ultimately maturity.

It points out that the fresh fruit bunch yield and oil extraction rate of 23 tonnes per ha and 24% respectively by 2015 are more crucial.

However, Ong Chee Ting from Maybank Investment Bank Research is of the opinion that potential M&As to boost earnings growth that can be funded by FGVH's RM6bil cash pile will be an immediate re-rating catalyst.

He says in a note to clients, “Its immediate target is an additional 20,000 ha of young oil palm estates from Felda.”

On its share price performance, the analyst says she does not see it outperforming the market at the moment with the low CPO prices recently.

Compared with its peers, she reckons FGVH has some catching up to do, mainly because the age profile of its palm trees will affect production efficiencies.

“However, the company has recognised the issue and is working on it,” she adds.

Gan also points out that FGVH has the oldest age profile for its trees among the planters the research house tracks.

“We believe that production from its Malaysian estates will turn the corner in 2015 and begin experiencing positive albeit timid growth of between 0.3% and 1.7% from 2015 to 2018. Subsequent growth from 2019 onwards should be even stronger as its young producing trees from its replanting initiatives (which by then will represent a larger portion of the firm's planted area) progress in age,” he says.

RHB Research analyst Hoe Lee Leng says in her report: “Catalysts required for a re-rating would include the acquisition of a larger stake in Felda Holdings Bhd, making it into a subsidiary, instead of an associate, which would result in a much more transparent structure; the disposal of its non-core assets and possibly its non-performing assets; the turnaround of its downstream divisions and a marked improvement in age profile and yields upon completion of its replanting programme.”

Downstream activities
Gan echoes: “There is room to simplify the complicated structure in its associate company, Felda Holdings Bhd, which focuses on downstream activities.”

He reckons the company will benefit if consolidation can be done for its upstream and downstream outfits.

On the spot crude palm oil prices that have plunged to RM2,297, the lowest in two years on Tuesday, he says: “If prices are sustained at this level for a long time, impact on its earnings will be seen. Otherwise, the level of impact will not be as great.”

He notes that the share prices of other plantation players like Sime Darby Bhd and Kuala Lumpur Kepong Bhd were also hit on Wednesday following the fall in spot CPO prices. However, plantation stocks rallied on Thursday following news of the possible revision of the CPO export tax policy that will see it being reduced from the current 23% to between 8% and 10%.

Meanwhile, an analyst from a bank-backed investment firm says the plunge in CPO prices will pressure earnings but the level of impact depends on the full-year average of CPO prices which will only be known at the end of the year.

RHB Research's Hoe says: “Overall, we project earnings growth of 1.3% for financial year 2012, followed by an increase of 6.4% to 7.1% in 2013 to 2014. Net profit compound annual growth rate for 2011 to 2014 is estimated at 4.9% per annum.

She notes that close to 70% of the plantation player's net earnings is derived from the upstream plantations operations.

“The company's earnings outlook is driven mainly by our CPO price assumptions of RM3,100 per tonne for 2012, RM2,900 per tonne for 2013 and RM3,000 per tonne for 2014.

“Based on our analysis, every RM100 per tonne change in CPO price would change our earnings by 4% to 6% per annum,” she says.

Market perform
Maybank Investment Bank Research initiated coverage on FGVH with a “market perform” recommendation due to its relatively sober earnings growth given the downward CPO price projections, and “unexciting valuations”.

Dividend-wise, Ong says FGVH's payout policy of 50% of yearly profit after tax and after minority interest translates to net dividend yields of 2.90% to 3.9% respectively based on earnings forecasts over 2012 to 2014.

He also points out the potential inclusion of the palm oil operator into the FBMKLCI 30 index by year-end based on its market capitalisation.

Maybank Investment Bank Research's target price for the counter is RM5.20, Affin Investment Bank maintains its target price at RM5.30 while RHB Research tags its fair value at RM5.00.

Data from Bloomberg shows that two out of the 18 analysts covering the stock have “buy” calls on the counter while 10 are calling it a “hold” and six have a “sell” call with a 12-month target price of RM4.84.

The counter closed at RM4.76 on Thursday but it is still a 4.62% premium compared with its retail initial offer price of RM4.55. The share price is lowest since its IPO, highest being at RM5.50 on July 4, 2012.