Tuesday, May 24

SOP to see short term headwind for longer term gain


KUCHING: Sarawak Oil Palms Bhd’s (SOP) move in acquiring younger age plantations to secure its long-term prospects has been viewed positively by analysts.

However, they pointed out that there is a potential short term earnings per share (EPS) dilution following the rights issue which might cap near term share price upside.

In a recent report, the research arm of Maybank Investment Bank Bhd (Maybank IB Research) observed that based on its back-of-the-envelope calculation, SOP’s financial year 2017 (FY17) EPS could be diluted by up to 19 per cent as it acquires young estates in a deal worth RM873 million in cash via rights issue and borrowings.

Earlier this week, SOP had announced its proposition to acquire the entire equity interest in the issued and paid-up share capital of Shin Yang Oil Palm (SYOP) from Shin Yang Holding Sdn Bhd (Shin Yang) for a total cash consideration of circa RM873 million.

Maybank IB Research noted that the acquisition would be funded via borrowings, internal funds, and proposed renounceable rights issue of up to 128 million rights shares on the basis of two-for-every-seven existing SOP shares.

“This RM873 million acquisition will be funded via a combination of borrowings, internal cash and rights issue.

“Assuming SOP raises RM349 million (net of expenses) from its rights issue, it will still need RM524 million from fresh borrowings to fund the acquisition.

“According to its Bursa announcement, SOP’s proforma net gearing (as at December 31, 2015) will rise to 70 per cent post-acquisition of SYOP (from 47 per cent),” it said.

The research team further pointed out that as SYOP’s tree age profile is still young, the company’s profitability has been low.

As such, it said EPS could be diluted by up to 19 per cent as the incremental earnings from SYOP is barely enough to cover the borrowing costs raised to fund the acquisition of SYOP. The EPS dilution would also come from SOP’s enlarged share base.

Valuation wise, Maybank IB Research believe the brownfield estates are fairly priced at an implied enterprise value per planted hectare of circa RM34,000.

“We have assumed a RM10,000 per hectare cost for its plantable reserves. Furthermore, the SYOP acquisition comes with a 60t/hr mill that was built in 2012,” it added.

“Over time, as trees hit prime maturity (which is in three to four years time without any new planting), fresh fruit bunches (FFB) yield and earnings would peak,” the research team said.

Overall, it said that while it like the longer term prospects of SOP acquiring younger plantations, it remained concerned that the potential short term EPS dilution following the rights issue might cap near term share price upside.

Hence, it downgraded its call on SOP to ‘hold’ from ‘buy’, for now.