By Stephanie Jacob
Analysts have a mixed outlook on plantations group United Malacca Bhd following the release of the latter’s first half for financial year 2016 (1H16) results and its announcement that it has acquired an 83% stake in PT Lifere Agro Kapuas (LAK) from Lincoln Wilshire Investments Ltd (Lincoln Wilshire) for a total cash consideration of US$66.4 million or RM285 million.
According to Kenanga Research, United Malacca’s 1H16 results came in at just 39% of its forecast of RM66.8 million due to lower-than-expected crude palm oil (CPO) prices of RM2,139 per metric tonne compared to its current year 2015 (CY15) estimate of RM2,200 per metric tonne forecast.
Meanwhile, TA Research said that the results accounted for 46% of its full year estimates but said that it was expecting higher CPO prices ahead.
However, it was United Malacca’s acquisition of LAK which caused the research houses to diverge in their ratings.
Kenanga which has upgraded the group to “outperform” from “market perform” said: “We believe United Malacca’s long-awaited maiden expansion outside Malaysia will serve as a re-rating catalyst as the doubled landbank with existing young planted area should lead to above-average fresh fruit bunch (FFB) growth in the long run”.
It said while the deal will cause its FY16 earnings to be diluted, the acquisition will likely become earnings accretive in FY17 onwards with an estimated net contribution of RM13.4 million. Kenanga added that “the new area has a very young average age with 99% of trees below five years. We estimate the new area to reduce United Malacca’s average tree age from 9.7 years to 7.4 years”.
However, it also cautioned that third quarter for financial year 2016 (3Q16) might be softer because of a lagged impact from the drought and due to the seasonal downtrend which is likely to hit FFB production.
United Malacca’s management expects the droughts in Sabah to negatively impact their FFB production in FY16 and there could be a lagged impact into FY17 as well.
Based on this guidance, Kenanga has lowered its forecast for the group’s Malaysian FFB growth to 6.4% from 8.5% previously. However, Kenanga expects FFB growth to improve by between 6% to 14% going into the latter part of FY16 and into FY17.
It has increased its United Malacca target price to RM7.05, it said: “We up our target price to RM7.05 as we roll forward our valuation base year to CY16E (estimated) for higher earnings per share (EPS) of 33.6 sen from 32.8 sen.
“We also apply a higher forward price-earnings ratio of 21.0x from 19.2x, as we up our valuation basis to +0.5 standard deviation points from its mean valuation. We believe this is fair as United Malacca’s FFB growth prospects of 14% for FY17 is above the sector average which is 6%, plus its major landbank acquisition warrants a re-rating.”
Meanwhile, TA Research has downgraded United Malacca to “hold” following its recent acquisition of LAK. It said: “We are neutral on the news as the acquisition will be earnings dilutive in the short term but could be significantly positive in the long term.
“A quick back-on-the envelope calculation shows that the acquisition would dilute earnings by between 12% to 15% in FY17 and FY18, after taking into account the financing cost of approximately RM4 million to RM6 million (at a 2% to 3% interest rate from a loan) and the estate cost.”
It also highlighted that the acquisition was the first time United Malacca was gearing up to fund expansion plans. It further noted that the group might venture into the downstream refining business as LAK already has the land and permits to do so.
“This is a significant departure from the group’s long held business model of focusing on upstream and shying away from debts fueled acquisitions. Note that United Malacca is currently in a net cash position with zero borrowing (liquid cash ~RM195 millon). The acquisition will place the group in a net gearing position of 0.05x,” said TA Research.
Overall, it has left its earnings forecasts for United Malacca unchanged but has reduced its target price-earnings ratio to 18x from 21x previously, to reflect the potential earnings dilution from this acquisition.
TA Research has reduced its target price to RM6.38 and the group has been downgraded to “hold”. It said: “Although we still like the company for its well managed operations and attractive dividend policy, upside to share price in the short term will be capped by the earnings impact arising from this acquisition”.
As at 12pm, United Malacca was trading up by 9 sen at RM5.95.
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