This article first appeared in The Edge Financial Daily, on July 26, 2016.

Felda Global Ventures Holdings Bhd
(July 25, RM1.87)
Maintain add with a higher target price (TP) of RM2.08: The Edge weekly reported Felda Global Ventures Holdings Bhd (FGV) president and chief executive officer Datuk Zakaria Arshad as saying the company is no longer looking to acquire a stake in PT Eagle High Plantations Tbk.

We view this as a positive development as we share the market’s concerns about the implications of this planned RM2.8 billion deal ever since it was announced in June 2015. The last official announcement to Bursa Malaysia by FGV on this issue on Dec 1, 2015 was that the agreements to purchase a 37% stake in Eagle High and Rajawali sugar assets will no longer be applicable.

An official announcement that FGV is no longer buying a stake in Eagle High could act as one of four potential catalysts for the stock. We had earlier voiced our concerns that the Eagle High acquisition could dilute FGV’s shareholders’ funds if the stake is bought at a premium to market price. The other three catalysts are: i) plans to cut RM100 million administrative costs in financial year 2016; ii) improving fresh fruit bunch (FFB) yields via better agronomic practices; and iii) sale of assets that are loss-making.

FGV’s share price was RM1.86 on the day it announced plans to acquire Eagle High. The planned acquisition, coupled with disappointing earnings, has pushed down its share price to as low as RM1.19, before rebounding recently. We expect the stock to be rerated when FGV officially announces that it is no longer eyeing Eagle High. Further rerating could be on the cards if Zakaria delivers on the promise to cut costs, improve FFB yields and earnings, and focus on its core and profitable businesses.

We maintain our non-consensus “add” rating on the stock, with a higher sum-of-parts (SOP)-based TP of RM2.08. Following the low likelihood of FGV acquiring a stake in Eagle High, we have removed the 15% discount previously accorded to its SOP to arrive at our TP. Our revised SOP implies a price-to-book-value of 1.2 times for the group, which is still attractive relative to its Malaysian sector peers’ average of 1.9 times. Downside risks include failure to execute plans to improve earnings. — CIMB Research, July 23