No synergy seen in Felda’s Eagle High buy

No synergy seen in Felda’s Eagle High buy

KUALA LUMPUR: More questions are being raised on the rationale for the purchase of a 37% non-controlling stake by Federal Land Development Authority (Felda) in Indonesia’s PT Eagle High Plantations Tbk as there would be no unlocking of value for Felda. In fact, the US$505.4 million or RM2.26 billion investment should be spent on Felda’s locally listed arm Felda Global Ventures Holdings Bhd (FGV).

“Felda is not acquiring a controlling stake in Eagle High [and] it cannot effect a mandatory general offer. As a result, Felda cannot derive synergy from the buy unlike Sime Darby Bhd’s acquisition of New Britain Palm Oil Ltd (NBPOL).

“Since there is no asset [but] only a stake, Felda cannot unlock the value from this exercise,” an analyst with a local bank, who declined to be quoted, said.

The analyst added that the acquisition at US$505.4 million by Felda’s FIC Properties Sdn Bhd (FICP), which is more than double the average share price of Eagle High, is a significant premium and therefore “too pricey” for a loss-making company.

The analyst told The Edge Financial Daily via telephone that FICP’s buy at 580 rupiah (19 sen) per share is expensive and it would take Felda a “long time” before it can reap profits partly because the shares are illiquid.

“According to Eagle High’s financial results for [the] first nine months of 2016, it made a loss. The cost of 580 rupiah per share is more than 100% of the average share price. Eagle High’s share price would have to double before Felda’s investment can break even.

“That is the only way I see Felda benefiting from the acquisition because it has no control over the management. It might be looking to benefit through dividends with crude palm oil (CPO) price surging beyond RM4,000 per tonne.

“However, the prospect [of that happening] at this moment is not likely. It will be a long time before Felda sees any benefit,” the analyst said.

Last Friday, FICP inked a sale and purchase agreement with PT Rajawali Corp to acquire the stake in Jakarta-listed Eagle High, which is also one of Indonesia’s largest palm oil companies.

Eagle High, which is 74.07% owned by PT Rajawali, saw net loss widen to RM100 million in its nine months ended Sept 30, 2016 (9MFY16) from RM27.4 million last year due to weak fresh fruit bunch (FFB) production and sizeable interest expenses while revenue dipped 22.5% to RM532.7 million compared with RM685.8 million in 9MFY15.

According to filings with the Indonesia Stock Exchange, the company suffered a net loss of RM60 million on higher revenue of about RM900 million in its financial year ended Dec 31, 2015 (FY15) versus RM63.1 million net loss and RM765.7 million revenue in FY14.

Asked if the acquisition constituted a “bad call”, the analyst said the question should instead be why Felda was “desperate” to buy a stake in Eagle High.

“The investment by Felda was better spent on FGV which has a lower enterprise value per hectare (EV/ha).

“This is a decision made by a government entity [so] they must justify the desperate need for this acquisition,” the analyst said.

No synergy seen in Felda’s Eagle High buy
December 29, 2016 -The Edge Financial Daily


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