M&A: FGV fair value at RM5.65

‘BUY’ CALL: Research firm believes Felda Global Ventures will be able to maintain market with bigger landbank M&A Securities, which has called a "buy" on Felda Global Ventures Holdings Bhd, sees an upside of 24 per cent to the plantation company's IPO price of RM4.55.

In its research note, the firm is giving FGV a fair value at RM5.65 which translates into a price earnings multiple of 12.2 times, which is "still relatively low compared to its peers". The research firm said FGV, being a commercial arm of Felda is exposed to commercial crop through a land lease with Felda for 355,864ha of up to 99 years.

FVG will be listed on the main market of Bursa Malaysia this Thursday. "Going forward, there will be acquisitions of additional plantation landbank where it is available and economically attractive," M&A said. M&A Securities noted that half or RM2.2 billion of the IPO proceeds will be used to increase the company's landbank size in the Asean and Africa region.

With a plantation landbank size in the top three, just behind Sime Darby Bhd and Golden Agri Resources Ltd, the research firm believes FGV will be able to maintain its market with potential to increase its landbank with more acquisitions coming and commencement of new palm oil mills.

FGV is one of the world's largest millers of fresh fruit bunches (FFB) with 70 mills located throughout Malaysia. With 355,864ha of plantation estates, it has operated 343,521ha of oil palm estates in Malaysia that produced 5.2 million tonnes of FFB in 2011. Its 49 per cent-owned associate Felda Holdings Bhd, meanwhile, is the largest producer of crude palm oil (CPO) in the world, based on production volume, having produced 3.3 million tonnes of CPO last year. M&A Securities said FGV's strength lies in its accessibility to the CPO output as its 70 palm oil mills are able to produce aggregate annual milling capacity of 20.4 million metric tonnes of FFB.

Another one of its strength is its hedging strategy, whereby its crop diversification among palm oil, sugar, rubber, soya and canola will help manage against the risk of commodities prices volatility. FGV's operations in 10 countries are also an asset as it has access to global customers while its strong research and development (R&D) support would be key to its focus on improving upstream production and efficiency. Last year, FGV spent RM32.9 million on R&D, to improve the productivity capacity and other agricultural products as well as other potential crops beside oil palm.

The securities firm added that with FGV's good value chain structure, it has managed cost efficiently and has the flexibility to optimise earnings from its integrated operations across the palm oil value chain between upstream and downstream businesses within the group. It also noted that about six per cent of the proceeds from the IPO, or RM260 million will be used to reduce FGV's overseas borrowing, reducing its debt to equity ratio from 81 per cent to 43 per cent.

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