Target Price: RM5.52
WE are initiating coverage of Felda Global Ventures Holdings Bhd (FGVH) with a buy call based on its good growth prospects. Based on our forecast FY2013 ernings per share (EPS) of 34.5 sen and a target CY2013 price to earnings ratio PER of 16 times (which we also apply to larger peers), target price for FGVH is pegged at RM5.52, implying a 21% upside from the institutional price.
Upon its listing, FGVH will be the second largest Malaysian plantation company by landbank and planted area, and the single largest producer of crude palm oil (CPO) in the world. Through 51%-owned MSM Malaysia Holdings, FGVH is the largest sugar producer in Malaysia, accounting for 57% of total production.
With an experienced management team and current low base, we believe the fresh fruit bunches (FFB) yield and oil extraction rate (OER) targets of 23 tonnes per ha and 24% by 2015 can be achieved, leading to FFB production growth of 3% to 5% per annum in spite of the old average age of approximately 17 years.
Intensive replanting as well as landbank expansion and plantation acquisitions are expected to drive further growth in production.
FGVH also has plans to acquire additional landbank in South-East Asia and Africa to increase CPO production from about 1.1 million tonnes currently to three million tonnes by 2017 an ambitious compounded annual growth rate of 22%. Felda settlers currently own 521,938ha planted mostly with oil palm.
The acquisition of these areas, through a similar land lease agreement or otherwise, would boost FGVH’s landbank by 150% to 853,313ha.
Around 49% or about RM2.2bil of the gross IPO proceeds of about RM4.6bil are earmarked for the acquisition of new plantation assets. Higher FFB and CPO production are expected to lead to an even greater economies-of-scale and lower cost of production per tonne.
There are also plans to increase rubber plantation landbank from 10,308ha (planted 9,472ha) to 30,000ha by 2017.
In 2011, revenue for FGVH’s downstream business surged by 91%. Notwithstanding that, gross loss surged from RM22.9mil in 2010 to RM233.5mil primarily due to a larger impairment of property, plant and equipment of RM164.7mil.
Operationally, gross profit margins were negative in 2010-2011 as prices of oleochemical products did not increase sufficiently to fully offset the significantly higher raw material costs.
The group has adopted a new business model for its downstream business in Canada, which involved a tolling and joint venture arrangements whereby the group will avoid the volatility in soy and canola prices, but instead will be paid tolling fees and reimbursement of operating costs.
FGVH’s balance sheet will be significantly strengthened after the IPO, boosting group gross cash reserves to about RM5.7bil.
The total indebtedness and gross gearing ratio of the group would be about RM8.2bil and 1.5 times respectively after the IPO or RM2.4bil and 0.4 times if the Land Lease Agreement (LLA) liabilities of RM5.8bil are excluded. With the sustained profitability of its core businesses, the group’s balance sheet is expected to strengthen further, especially if strategic plans are well executed.
The board’s intention to adopt a dividend payout ratio of 50% or more implies a relatively attractive and sustainable net dividend yield of approximately 4.8%.
Key risks to our valuation and share price performance include delays in the delivery of targeted FFB yield and OER improvements; rising cost of production due to rising cost of fertilisers and fuel and slower global economic growth cutting vegetable oil (including crude palm oil) demand and prices.