Felda Global Venture Holdings Bhd (FGVH) has been the undisputed worst plantation stock performer ever since its initial public offering (IPO) in July 2012. The share price decline was so bad that the company was removed from the Bursa Malaysia KLSE Index stocks.
Despite its shocking performance caused by substantially reduced profits, FGVH announced that it would acquire Indonesia’s Eagle High Plantations (EHP) at an outrageous price which is 72% above its existing market price. FGVH will pay Rp775 per share, which is Rp490 per share.
Worst, at Rp490 per share, it is already significantly inflated from its price exactly a month ago at Rp294! CIMB Research has a target price on the EHP stock at on Rp290. In essence, FGVH is actually purchasing EHP at an incredible 267% premium to CIMB fair valuation of the target company.
There was not a single investment research house which did not have a negative report on the proposed acquisition. Maybank Research expressed concern that despite purchasing 37% of the company and becoming the single largest shareholder in the Group, FGVH will not have any management control of the company.
After disposing the bulk of their stake to FGVH, PT Rajawali Capita will have only 28.5% stake left in Eagle high, down from 65.5%. However, they will curiously continue to remain as the “controller” of EHP. Maybank politely concluded that the “valuation appears steep for a non-controlling stake”.
Affin Hwang Capital downgraded FGVH from “Buy” to “Hold”, while most of the other investment banks maintained their “Sell” or “Underperform” ratings on the stock. Maybank had retained its “Hold” rating only because it actually believes that the deal may be called off.
We are keeping our earnings forecasts pending confirmation and completion of this deal. Nonetheless, we believe that this proposal is unlikely to go down well with investors as the acquisition is likely to be EPS dilutive in the short term given the steep transaction price for a non-controlling stake of 37%.
Credit Suisse estimate that FGVH earnings would be diluted by 16% and 18% in 2015 and 2016 respectively. They downgraded FGVH to “Underperform” from “Neutral” with a revised target price of only RM1.60.
CIMB Research was uncompromising in its “Sell” call, giving a damning review of FGVH’s proposed acquisition. It said that the FGVH valuation of EHP was at 63 times price earnings ratio for the 2015 financial year, “which is significantly above peers and FGVH’s own valuations”. The Bank estimated that the acquisition will “dilute FGVH’s earnings by 10% and raise the group’s net gearing ratio to 1.43x”.
CIMB also warned that the group “may have to write down the value of EHP post acquisition to reflect current market price, post this acquisition. The write down could amount to RM1.07 billion”. The amount is massive relative to FGVH’s net profits of only RM306.4 million for its financial year ending December 2014, a 69% drop from RM982.2 million in the previous year.
As at noon today, the market was unanimous in giving FGVH a big thumbs down for the proposal. The share price, already at a record low of RM1.86 previously tanked a further 9.7% to only RM1.68. This price represents a 63% drop since its IPO.
The shameful performance has not only damaged the reputation of the Prime Minister Dato’ Seri Najib Razak and his Cabinet Ministers who gave unreserved backing to the stock offering, but has also caused millions of losses to the ordinary Felda settlers who were coaxed into investing in FGVH.
As a result, due to the public interest and government share ownership in FGVH, the Board of Directors of FGVH must immediately call off the deal by terminating the Heads of Agreement with Rajawali to acquire EHP. This is to prevent even further losses to the investors which includes the FELDA, the settlers, the Employees Provident Fund, the Pension Fund, Lembaga Tabung Haji and various state governments.