HSP’s cancelled acquisition of a stake in Kretam has been viewed positively by analysts as it deemed the deal earnings as dilutive for the company.
KUCHING: Hap Seng Plantations Holdings Bhd’s (HSP) cancelled acquisition of a stake in Kretam Holdings Bhd (Kretam) has been viewed positively by analysts as it deemed the deal earnings as dilutive for the company.
HSP had announced that it has terminated its Share Sale Agreement (SSA) to acquire 55 per cent of Kretam after finalising its due diligence process and finding the results “unsatisfactory and unacceptable”.
The deal was valued at RM1.18 billion or RM0.920 sen per Kretam share.
On the terminated deal, Kenanga Investment Bank Bhd’s research arm (Kenanga Research) commented: “We are positive on the cancellation as we had noted that the incremental earnings contribution from the deal of circa RM45 million per year would not have offset the additional interest cost of RM50 million to RM100 million per year, leading to at least two years’ earnings dilution until HSP turned around Kretam’s operations.”
While the deal may have led to long-term synergies in terms of expansion into scarce Sabah landbank and the entry of HSP into downstream processing, the research team believed that the cancellation is sensible given the hefty valuation premium and immediate material earnings risk (up to 30 per cent).
It noted that the proposed offer price valued Kretam at a massive forward price earnings ratio of 77-folds (compared with circa 18-folds for average small-cap).
It pointed out that this would have pushed HSP’s net gearing to 0.5 to one-fold from its current net cash position.
“Without the Kretam deal, we expect HSP’s current outlook to be improved. As production trends turn positive towards 2H18, we think HSP earnings should begin picking up on lower unit costs.
“However, we do not expect outsize earnings for the sector given that palm oil prices are likely to remain capped on rising production, more so should soybean oil prices be suppressed by Chinese tariffs on US soy.
“However, the conclusion of this deal should ease investors’ concern about near term earnings headwinds, which should lead to better stability for HSP’s share price,” Kenanga Research opined.
Overall, the research team upgraded its call on the stock to ‘market perform’ from ‘under perform’.
It explained, “Despite HSP’s average FFB growth prospect (six per cent compared with the sector’s average of eight per cent), we think HSP commands an above-average valuation given its operations quality and healthy balance sheet position with net cast of RM65.5 million (8.2 sen per share) in the latest quarter, supporting its dividend yield of 3.5 per cent (compared with the sector’s average of 2.7 per cent).”