MARKET DEVELOPMENT
SOP to See Long-Term Positives From Potential Acquisition
SOP to See Long-Term Positives From Potential Acquisition
31/10/2016 (Borneo Post) - Sarawak Oil Palms Bhd (SOP) will likely gain long-term benefits if it successfully acquires the entire equity interest in Shin Yang Oil Palm (SYOP), analysts observed.
Kenanga Investment Bank Bhd’s research arm (Kenanga Research) noted that earlier this year, SOP proposed to acquire the entire equity interest in SYOP for RM873 million.
To fund the acquisition, SOP has proposed a two-for-seven rights issue which is expected to raise circa RM350 million, implying a rights issue price of RM2.70 to RM2.80 per share or at 24 to 27 per cent discount to current prices, it noted.
In the next one or two years, the research team added that the SYOP acquisition will likely see minimal earnings contribution.
However, it opined, “Despite the relatively small near-term earnings impact, we believe the long-term effect of the deal is positive as SOP’s gross land bank will be increased by 64 per cent to 119.7,000 hectare while planted land bank will increase by 36 per cent to 89,900 hectare.
“With SYOP’s average tree age of 7.0 years old, we estimate SOP’s post-acquisition average age to be reduced from 11.1 years to 10.1 years.
“We believe the young age profile of the acquisition and maturing area of circa 2,200 hectare between 2017 and 2019 should contribute to above-average fresh fruit bunches (FFB) growth from the financial year 2017 estimate (FY17E) onwards.”
It noted that SYOP owns 47,000 hectares of plantation land in Sarawak of which 23,800 hectare is planted; as well as one 60TPH palm oil mill.
“Valuations-wise, we believe the price tag of RM38,500 enterprise value per planted hectare is relatively cheap compared to historical transactions ranging between RM40,000 per RM95,000 per hectare in Sarawak.
“We estimate the deal to increase SOP’s FY17E net gearing from 0.4 to 0.6-folds, post-rights. The deal is expected to be completed by the fourth quarter 2016 (4Q16),” it commented.
It also noted that with supportive crude palm oil (CPO) prices and quarter-on-quarter (q-o-q) production jump of 22 per cent, it expected to see a solid 3Q16 improvement over 2Q16.
“Year-on-year (y-o-y), we expect the first nine months of 2016 (9M16) earnings to improve as well because the 9M production decline of 12 per cent to 725,600 metric tonne is offset by CPO prices which rose 17 per cent y-o-y to RM2,549 per metric tonne,” it added.
Overall, Kenanga Research said, “With its long-term positive FFB growth potential, extensive downstream capabilities and undemanding valuation against is peers, we rate SOP as a ‘trading buy’.”
Kenanga Investment Bank Bhd’s research arm (Kenanga Research) noted that earlier this year, SOP proposed to acquire the entire equity interest in SYOP for RM873 million.
To fund the acquisition, SOP has proposed a two-for-seven rights issue which is expected to raise circa RM350 million, implying a rights issue price of RM2.70 to RM2.80 per share or at 24 to 27 per cent discount to current prices, it noted.
In the next one or two years, the research team added that the SYOP acquisition will likely see minimal earnings contribution.
However, it opined, “Despite the relatively small near-term earnings impact, we believe the long-term effect of the deal is positive as SOP’s gross land bank will be increased by 64 per cent to 119.7,000 hectare while planted land bank will increase by 36 per cent to 89,900 hectare.
“With SYOP’s average tree age of 7.0 years old, we estimate SOP’s post-acquisition average age to be reduced from 11.1 years to 10.1 years.
“We believe the young age profile of the acquisition and maturing area of circa 2,200 hectare between 2017 and 2019 should contribute to above-average fresh fruit bunches (FFB) growth from the financial year 2017 estimate (FY17E) onwards.”
It noted that SYOP owns 47,000 hectares of plantation land in Sarawak of which 23,800 hectare is planted; as well as one 60TPH palm oil mill.
“Valuations-wise, we believe the price tag of RM38,500 enterprise value per planted hectare is relatively cheap compared to historical transactions ranging between RM40,000 per RM95,000 per hectare in Sarawak.
“We estimate the deal to increase SOP’s FY17E net gearing from 0.4 to 0.6-folds, post-rights. The deal is expected to be completed by the fourth quarter 2016 (4Q16),” it commented.
It also noted that with supportive crude palm oil (CPO) prices and quarter-on-quarter (q-o-q) production jump of 22 per cent, it expected to see a solid 3Q16 improvement over 2Q16.
“Year-on-year (y-o-y), we expect the first nine months of 2016 (9M16) earnings to improve as well because the 9M production decline of 12 per cent to 725,600 metric tonne is offset by CPO prices which rose 17 per cent y-o-y to RM2,549 per metric tonne,” it added.
Overall, Kenanga Research said, “With its long-term positive FFB growth potential, extensive downstream capabilities and undemanding valuation against is peers, we rate SOP as a ‘trading buy’.”