MARKET DEVELOPMENT
CIMB Research Retains Reduce Call on FGV
CIMB Research Retains Reduce Call on FGV
22/03/2016 (The Star) - CIMB Equities Research is retaining its Reduce call and sum-of-parts based target price of RM1.49 for Felda Global Ventures (FGV).
It said on Tuesday the key de-rating catalysts are poor results due to declining output and earnings dilution from its past acquisitions.
In January 2016, FGV posted a 17% on-year decline in fresh fruit bunches (FFB) output from its estates despite adding additional estates via acquisitions in past few years.
“This is significantly poorer than the FFB output achievement of the Malaysian palm oil industry of a 3% on-year decline for the same period,” it said.
In the latest development, FGV mutually agreed with the vendors and Zhong Hai to further extend the period for its proposed acquisition of a 55% stake in Zhong Ling Nutri-Oil Holdings Limited (Zhong Ling) to a day not later than April 8, 2016.
It had earlier extended the period to satisfy the conditions from March 4, 2016 to March 18, 2016.
FGV has also revealed that it had executed the shareholders agreement and the contracts for services for key personnel on March 18, 2016.
To recap, on Feb 26, 2016, FGV entered into two conditional sale and purchase agreements to acquire a 55% stake in Zhong Ling for RM976.3mil.
Zhong Ling is an investment holding company incorporated under the laws of Cayman Island. Its subsidiaries are mainly involved in the refining and production of peanut and other vegetable oils in China.
The company has 135,000 tonnes of refining capacity in Nantong city in Jiangsu province and 45 million packing capacity that can serve 80 million people in the province. It also has over 100 customer bases and a network of 60,000 retail outlets covering five southeast coastal provinces — Fujian, Jiangxi, Guangdong, Zhejiang and Jiangsu.
On Feb 26, FGV revealed that the acquisition would require the approval of Bank Negara and MOF but not shareholders’ approval.
However, Bursa Malaysia has written to FGV via a letter dated March 7, 2016 to inform the group that the proposed acquisition would be subject to FGV’s shareholders’ approval in compliance with Chapter 10 of the Listing Requirements. The group has received MOF approval on March 16, 2016.
CIMB Research pointed out FGV listed the rationales for the proposed acquisition of Zhong Ling as: (1) its established operations, with a proven track record. The group was established more than 20 years ago; (2) to expand FGV’s oils and fats capabilities in China; and (3) positive effect of 29% on its EPS for FY14 from 8.9 sen to 11.5 sen (based on management’s account of Zhong Ling for FY14).
“We remain concerned about the sustainability of the earnings from these assets in future years, in view of rising competition in the cooking oil markets in China and slowing demand for palm oil from China.
“Furthermore, the latest available audited earnings were for FY13, and FY14 earnings are based on management’s account.
“FGV’s historical track record in overseas downstream ventures has not been great and we see a lack of immediate synergies from the assets,” it said.
It said on Tuesday the key de-rating catalysts are poor results due to declining output and earnings dilution from its past acquisitions.
In January 2016, FGV posted a 17% on-year decline in fresh fruit bunches (FFB) output from its estates despite adding additional estates via acquisitions in past few years.
“This is significantly poorer than the FFB output achievement of the Malaysian palm oil industry of a 3% on-year decline for the same period,” it said.
In the latest development, FGV mutually agreed with the vendors and Zhong Hai to further extend the period for its proposed acquisition of a 55% stake in Zhong Ling Nutri-Oil Holdings Limited (Zhong Ling) to a day not later than April 8, 2016.
It had earlier extended the period to satisfy the conditions from March 4, 2016 to March 18, 2016.
FGV has also revealed that it had executed the shareholders agreement and the contracts for services for key personnel on March 18, 2016.
To recap, on Feb 26, 2016, FGV entered into two conditional sale and purchase agreements to acquire a 55% stake in Zhong Ling for RM976.3mil.
Zhong Ling is an investment holding company incorporated under the laws of Cayman Island. Its subsidiaries are mainly involved in the refining and production of peanut and other vegetable oils in China.
The company has 135,000 tonnes of refining capacity in Nantong city in Jiangsu province and 45 million packing capacity that can serve 80 million people in the province. It also has over 100 customer bases and a network of 60,000 retail outlets covering five southeast coastal provinces — Fujian, Jiangxi, Guangdong, Zhejiang and Jiangsu.
On Feb 26, FGV revealed that the acquisition would require the approval of Bank Negara and MOF but not shareholders’ approval.
However, Bursa Malaysia has written to FGV via a letter dated March 7, 2016 to inform the group that the proposed acquisition would be subject to FGV’s shareholders’ approval in compliance with Chapter 10 of the Listing Requirements. The group has received MOF approval on March 16, 2016.
CIMB Research pointed out FGV listed the rationales for the proposed acquisition of Zhong Ling as: (1) its established operations, with a proven track record. The group was established more than 20 years ago; (2) to expand FGV’s oils and fats capabilities in China; and (3) positive effect of 29% on its EPS for FY14 from 8.9 sen to 11.5 sen (based on management’s account of Zhong Ling for FY14).
“We remain concerned about the sustainability of the earnings from these assets in future years, in view of rising competition in the cooking oil markets in China and slowing demand for palm oil from China.
“Furthermore, the latest available audited earnings were for FY13, and FY14 earnings are based on management’s account.
“FGV’s historical track record in overseas downstream ventures has not been great and we see a lack of immediate synergies from the assets,” it said.