UPDATE REPORT 6 November 2007

RECOM Hold
PRICE RM3.70

Investment highlights

Scrapping Wawasan Sedar acquisition. BLD Plantation (BLDP) recently withdrew its plans to acquire a 49.9% stake in Wawasan Sedar from a related party for RM261.6m. The withdrawal was made after its major shareholder, KTS Holdings requested the Securities Commission (SC) for a waiver from its undertaking to address any potential conflict of interest between BLDP and its subsidiaries and the oil palm estates owned by KTS. The SC approved the waiver subject to several conditions.

Disappointed with the turn of events. We are disappointed that the proposed acquisition of related party assets was called off despite the bullish prospects for CPO price. The acquisitions would have been immediately earnings accretive to BLDP at current CPO prices. We feel that any subsequent acquisitions of significant planted estates by BLDP in the near future are likely to cost more following the strong run-up in CPO price over the past year.

Upgrading earnings by 16% for FY07. We are raising our net profit forecast for FY07 by 16% to account for our recent CPO price upgrade. We also introduce FY08-09 forecasts. Our earnings projections assume that the group achieves spot CPO price for its palm products.

Recommendation raised from sell to HOLD. Our target price rises from RM2.80 to RM4.70 as we roll it a year forward to end-08 and up our target P/E from 9x to 12x. The higher P/E rating takes into account the group’s strong FFB output growth prospects given that 36% of its total planted estates are immature. Our new target P/E represents a 30% discount to our target for large-cap planters. This implies 27% upside to the share price against our expected market return of 23%. In view of the potential upside, we have raised our rating for the stock from sell to HOLD. The group’s attractive P/E rating and EV/planted ha of RM16,800 are partially negated by our concerns over the illiquidity of the shares, lack of transparency and our disappointment with the decision to abort the Wawasan Sedar deal. We prefer bigger-cap players like KL Kepong and Asiatic for exposure to the plantation sector.

Recent developments
Cancel plans to acquire related party estates. BLD Plantation (BLDP) recently withdrew its plans to acquire a 49.9% stake in Wawasan Sedar from a related party for RM261.6m. The withdrawal was made after its major shareholder, KTS Holdings requested the SC for a waiver from the undertaking made on 16 Sep 2002 during its initial public offering (IPO) to address any potential conflict of interest issue between BLDP and its subsidiaries and the oil palm estates owned by KTS.

SC grants approval with conditions. The SC has approved the proposed waiver subject to the following conditions: (1) BLDP to be given the first right of refusal in the event KTS intends to sell or if there is any offer to purchase the six plantation companies; (2) the proposed waiver is subject to BLDP shareholders’ approval; (3) the directors and substantial shareholders of BLDP who are deemed to be interested abstain from voting and deliberating on the proposed waiver; and (4) independent members of the board appoint an independent advisor to advise the independent directors and minority shareholders of BLDP at the EGM to be convened to vote on the resolutions.

Surprised by the turn of events. We are disappointed that the proposed acquisition of related party assets was called off despite the bullish prospects for CPO price. The acquisitions would have been immediately earnings accretive to BLDP at current CPO prices and would have beefed up BLDP’s estate size by 31.7%, making it a larger listed player. We feel that any subsequent acquisitions of significant planted estates of the same size by BLDP in the near future are likely to cost more given the strong runup in CPO price over the past year.

Earnings outlook
Upgrading earnings by 16% for FY07. We are raising our net profit forecast for FY07 by 16% to account for our recent 9% upgrade in local CPO price assumption to RM2,380 per tonne. We also introduce profit forecasts for FY08 and FY09. Our earnings projections assume that the group has not entered into any forward positions for its CPO and will sell all its palm products on a spot basis.

Strong EPS growth. We project BLDP to record strong net profit growth of 83% for FY07 and 23% for FY08, driven mainly by rising CPO prices. The company’s earnings are highly leveraged to CPO price as it is a pure planter. We estimate that every 1% change in CPO price would have a 1.9% impact on our FY08 net profit.

Recommendation
Upgrade TP to RM4.70. Our target price rises from RM2.80 to RM4.70 as we roll it a year forward to end-08 and up our target P/E from 9x to 12x. The higher P/E rating takes into account the group’s strong FFB output growth prospects given that 36% of its total planted estates are immature. Our new target P/E represents a 30% discount to our target for large-cap planters.

Raised recommendation from sell to HOLD. Our target price implies 27% upside to the share price. As such, we raise our call from sell to HOLD. Our concerns over the illiquidity of the shares, lack of transparency and our disappointment with the decision not to go ahead with the Wawasan Sedar deal are offset by the group’s cheap P/E ratings and undemanding EV/planted ha of RM16,974.

filed : Scrapping Wawasan Sedar.pdf