Genting Plantation - OUTPERFORM - Expanding landbank aggressively by 45%

News 

- Entered into a joint venture with Global Agrindo Investment (GAI) to develop 74,390 ha of plantation land in Central Kalimantan, Indonesia.

- Genting Plantation (GENP) will pay US$66m to GAI. Another US$50m will be injected into the JV via subscription of new shares.

- GENP will have an effective stake of 60% in the Indonesian subsidiary. (Refer Page 2).

- Out of the total 74,390 ha of land, 18,345ha (or 25%) of it has been planted. 4,195 (or 23%) of the planted area are under plasma scheme.

Comments 

- Positive on the deal. Total plantation landbank will increase significantly by 45% to 239,950ha. GENP’s total landbank will then overtake IOI’s total landbank of 179,974ha to become Malaysia’s third largest plantation company by landbank size behind SIME (873,222 ha) and KLK (250,729 ha).

- Planted area will also jump 20% to 111,929 ha.

- The deal’s effective land pricing of c.RM7,800/ha (Refer Page 2) seems fair as 25% of the land has been planted. We gather that the latest greenfield plantation land deals in East Kalimantan were transacted at the range of RM541/ha - RM1276/ha.

Outlook 

- Long term growth is secured as 53% of its total landbank is now still unplanted (previously 43%).

Forecast

 - Step up FY14E-FY16E earnings by 5%-8% as a result of 6%-10% increase in FFB production. 

- FY12E-FY13E earnings are left unchanged as we expect the land to only start bearing fruits from FY14E onwards. Although  25% of the total area has been planted, we think the oil palm trees there is still immature as PTGAL (the subsidiary who owns the land) is still reporting net loss of RM1.6m for FY10. Oil palm tree usually starts to produce FFB at 3.5 years old.

Rating  UPGRADE TO OUTPERFORM

- With the big jump in  its total landbank, we expect the stock valuation to rerate closer to the current big cap planters Fwd PER of 17.0x.

Valuation  

- Raising our TP to RM10.70 (previously RM9.90), based on higher PER of 16.4x (previously 15.2x) on our unchanged FY12E EPS of 65.3 sen.

- We have applied 1 Standard Deviation above its average Fwd PER to arrive at a 16.4x Fwd PER (previously 15.2x @ +0.5SD), which is higher than its peers’ +0.5SD, given more sizeable landbank with higher long term FFB growth potential.  

Source: Kenanga