Felda Global Ventures - Too big to miss

We are initiating coverage on Felda Global Ventures Holdings (FGVH) with a MARKET PERFORM call and a Target Price (TP) of RM4.65 based on SOP valuation. The TP implies a FY13E Fwd. PER of 15.2x, which is similar to its large cap plantation peers. On the positive side, FGVH is the third largest listed planter globally. In addition, we reckon that FGVH is also poised to be included in the FBM KLCI after the index’s next semi-annual review  in Dec. However, its unexciting FY12E-FY13E core earnings outlook at RM0.96b-RM1.11b (due to weak CPO prices) and the expiry of the lock-up arrangement for its cornerstone investors by end-Dec should keep the upside limited for the share price.

FGVH is the third largest listed planter in the world with a total planted area of 323,587 ha* and a FY11 FFB production of 5.20m mt, just behind SIME and Singapore-listed Golden Agri. FGVH  distinguishes itself globally by being among the handful of plantation companies of such size in the global equity scene. We believe the CPO price outlook is still positive in the long term due to the increasing global population and rising per capita consumption in China and India amidst the scarce availability of productive plantation land, which should benefit FGVH in our view.

Potential landbank expansion by 130,000 ha each in  FY12E and FY13E.  A total of RM2.19b (or 49% of the RM4.46b IPO proceeds) has been reserved for the acquisition of plantation assets within three years from the IPO. We believe FGVH can afford to buy up  to 130,000 ha of greenfield land annually (based on recent greenfield plantation land transactions of US$450/ha in Cambodia and a USD/MYR rate of 3.10). Should this be the case, any new purchases will be a good catalyst for FGVH as plantation landbanking is usually viewed positively by the market and will enhance the company’s long term FFB growth potential.

Likely to be a FBMKLCI member.  With its huge market cap of c.RM16.8b, FGVH will be the 23^rd  largest stock by market cap, slightly below RHB’s current market cap of RM16.9b.  Big cap planters in the index tend to command an average 30% premium valuation over the non-index planters.

May enjoy premium valuation from its purer plantation earnings. FGVH’s plantation division gross profit made up 89% of the group’s total gross profit in FY11. We believe the earnings proportion at the EBIT level should be almost similar (at more than 85% of the group’s EBIT). Effectively, FGVH’s EBIT proportion of plantation earnings is higher than its big cap peers such as SIME (59%), IOICORP (55%) and KLK (84%). Generally, big cap planters on the index with purer plantation earnings tend to command a higher valuation with KLK trading at 16.4x FY13E PER against IOICORP (15.8x) and SIME (14.9x).

FY12E core earnings should decline 10% YoY to RM0.96b but will improve 16% YoY to RM1.11b in FY13E.  We believe FGVH’s FY12E earnings should be lower YoY in line with the expected lower average CPO price at RM2975/mt (-8% YoY) and a lower FFB production of 4.87m mt (-6% YoY). However, FY13E earnings should recover 16% YoY in line with the expected improvement in the FFB production at 5.52m mt (+13% YoY) and a slightly better average CPO price of RM3000/mt (+1% YoY). The key earnings risk for both FY12E-FY13E is the volatility in CPO prices.

Source: Kenanga