THE BUZZ
SOP has entered into a sale agreement to purchase the remaining 40% and 35% equity interests in its subsidiaries, SOP Beluru and SOP Kemena, for a combined cash consideration RM242.5m. The seller is SOP’s major shareholder, Shin Yang Holdings.
OUR TAKE
The land. SOP Beluru has a total planted area of 12,352 ha in Miri, Sarawak, the vast majority of which is immature. The trees in the estates are one to four years old. SOP Kemena, meanwhile, has a planted area of 9,974 ha in Bintulu, with most trees of between three and five years old. The Kemena estate began producing FFB in 2010, with a FY11 yield of 6.6 tonnes per planted ha (we estimate the estate’s FY11 FFB yield to be about 8.3 tonnes per mature ha). Production from these two estates is still far from peaking given their very young tree age profiles but we expect output to increase organically as the trees mature over time. Beluru sits on peat soil, while some 80% of Kemena is on peat.
A good deal. Despite the purchase being a related party transaction (note that Shin Yang is the seller), we believe that SOP got a favourable deal with this purchase. The blended transaction price per ha is USD9,400 per ha, substantially cheaper than the valuation for TSH’s bid for Pontian United Plantations at an estimated ~USD16k-20k per ha, and similar to the fairly cheap USD9,250 per ha valuation that the Samling group is offering to take Glenealy Plantations private at. The purchase of a 35% equity interest of the FFB-producing Kemena estate will place the transaction at an implied price per ha of USD11,200 and the largely immature Beluru at USD8,100 per ha. Both the estates have already been under SOP’s care since initial planting.
Financial impact. Being a cash transaction, the purchase will give rise to an incremental interest expense of RM4.4m per year for the RM100m that SOP will be borrowing to fund the purchase. SOP currently sits on a marginally net debt position of RM42.8m. With the trees still very young (and hence not as productive as fully mature ones), the estates are likely to simply break even at the moment. As such, minority interest reduction is likely to be minimal in FY13. Over the next five years, however, SOP’s increased equity interest in its subsidiaries could save the company RM17.2m a year in minority interest leakages, assuming a CPO price of RM3,000, 16-tonne FFB yield (since some of these trees will yet hit peak in five years’ time) and a 20% net profit margin. We understand that Beluru, being a largely immature estate, is loss-making while Kemena is marginally profitable.
Maintain BUY. We are marginally trimming our FY12 and FY13 earnings estimates by 0.2% and 1.0% respectively to incorporate transaction expenses amounting to RM0.77m for FY12 and incremental before-tax interest expenses of RM4.4m. We believe that minority interest savings will start to kick in materially in FY14 when the trees further mature. Our FV is revised a tick lower to RM9.27, based on a 13.0x FY13 PE.
SOP has entered into a sale agreement to purchase the remaining 40% and 35% equity interests in its subsidiaries, SOP Beluru and SOP Kemena, for a combined cash consideration RM242.5m. The seller is SOP’s major shareholder, Shin Yang Holdings.
OUR TAKE
The land. SOP Beluru has a total planted area of 12,352 ha in Miri, Sarawak, the vast majority of which is immature. The trees in the estates are one to four years old. SOP Kemena, meanwhile, has a planted area of 9,974 ha in Bintulu, with most trees of between three and five years old. The Kemena estate began producing FFB in 2010, with a FY11 yield of 6.6 tonnes per planted ha (we estimate the estate’s FY11 FFB yield to be about 8.3 tonnes per mature ha). Production from these two estates is still far from peaking given their very young tree age profiles but we expect output to increase organically as the trees mature over time. Beluru sits on peat soil, while some 80% of Kemena is on peat.
A good deal. Despite the purchase being a related party transaction (note that Shin Yang is the seller), we believe that SOP got a favourable deal with this purchase. The blended transaction price per ha is USD9,400 per ha, substantially cheaper than the valuation for TSH’s bid for Pontian United Plantations at an estimated ~USD16k-20k per ha, and similar to the fairly cheap USD9,250 per ha valuation that the Samling group is offering to take Glenealy Plantations private at. The purchase of a 35% equity interest of the FFB-producing Kemena estate will place the transaction at an implied price per ha of USD11,200 and the largely immature Beluru at USD8,100 per ha. Both the estates have already been under SOP’s care since initial planting.
Financial impact. Being a cash transaction, the purchase will give rise to an incremental interest expense of RM4.4m per year for the RM100m that SOP will be borrowing to fund the purchase. SOP currently sits on a marginally net debt position of RM42.8m. With the trees still very young (and hence not as productive as fully mature ones), the estates are likely to simply break even at the moment. As such, minority interest reduction is likely to be minimal in FY13. Over the next five years, however, SOP’s increased equity interest in its subsidiaries could save the company RM17.2m a year in minority interest leakages, assuming a CPO price of RM3,000, 16-tonne FFB yield (since some of these trees will yet hit peak in five years’ time) and a 20% net profit margin. We understand that Beluru, being a largely immature estate, is loss-making while Kemena is marginally profitable.
Maintain BUY. We are marginally trimming our FY12 and FY13 earnings estimates by 0.2% and 1.0% respectively to incorporate transaction expenses amounting to RM0.77m for FY12 and incremental before-tax interest expenses of RM4.4m. We believe that minority interest savings will start to kick in materially in FY14 when the trees further mature. Our FV is revised a tick lower to RM9.27, based on a 13.0x FY13 PE.
Source: OSK
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