• FGV’s proposed acquisition of a 37% non-controlling stake in Eagle High for USD680m is expensive at ~USD17,400/ha.
• We make no change to our earnings forecasts, imputing the possibility that the deal will not go through.
• Maintain HOLD with an unchanged TP of MYR1.94 on 16x 2016 PER peg. But expect some short term selling pressure.

What’s New

FGV has signed a Heads of Agreement (HoA) with the Rajawali Group to buy (1) a 37% non-controlling equity stake in Eagle High (BWPT IJ, NR) for USD680m, via ~USD632m cash (or MYR2,365m equivalent) and the issuance of 95m new FGV shares valued at ~USD47m (MYR1.86/FGV sh), (2) a 95% equity stake in a 47.7kha greenfield sugar plantation in Papua Province for ~USD67m cash. A due diligence is expected to be completed no later than 31 July. Thereafter a conditional SPA (CSPA) will be signed. Among the condition precedents are FGV (i) obtaining the approval of shareholders, and (ii) be exempted from a mandatory tender offer to Eagle High’s minority shareholders as Rajawali remains the “controller” (despite FGV emerging as the largest shareholder).

What’s Our View

The transaction price for Eagle High is estimated at ~Rp770/sh, a 71% premium to its last traded price of Rp450/sh, and an EV of USD17,400 per nucleus planted ha. After netting borrowing costs, this deal is most likely to be EPS negative in the near term. Based on Bloomberg estimates, the acquisition price translates to a forward 2015/2016 PER of 52x/38x.

Even though Eagle High has good long term growth prospects given its young trees of 8 years in average age, 137,606 ha of nucleus planted area and a huge plantable reserves (260,000 ha), valuation appears steep for a non-controlling stake. We expect some selling pressure on FGV and its shareholders may reject this deal.

Source: Maybank Research - 15 Jun 2015