CIMB Research positive on FGV cancellation of China deal

Going downstream: The proposed acquisition of Zhong Ling Nutri-Oil is in line with FGVHB

KUALA LUMPUR: CIMB Equities Research is positive on Felda Global Ventures’ (FGV) decision to abort its plan to acquire a 55% stake in China-based Zhong Ling for RM976.3mil due to unfulfilled conditions. 

The research house said on Monday the acquisition could have diluted the future earnings of the group.   

“We maintain our Reduce call due to concerns over weak earnings. FGV’s 2M16’s fresh fruit bunches (FFB)  output declined by 16% on-year, worse than the industry’s 6% decline,” it said.    

CIMB Research said the decision to scrap the deal came eight days after FGV appointed Datuk Zakaria Arshad as its new group CEO. 

“We are encouraged by the decisive action of the new CEO to abort this deal in view of the group’s challenging business outlook. 

“This could suggest the group may focus on improving efficiency and profitability of its existing plantation and downstream assets, instead of pursuing M&As.  Maintain Reduce due to weak earnings prospects,” it said.

Last Friday, FGV announced it had called off its planned purchase of Zhong Ling as conditions precedent set out in the sale and purchase agreement one and two could not be fulfilled within the stipulated time frame, nor have been waived. 

As such, FGV has issued termination notices to the vendors and Zhong Hai Investment Holdings. FGV said it will not be pursuing or taking any legal action pursuant to the termination. 

“We are positive on this news. This is because we are concern that the acquisition of Zhong Ling would have diluted the future earnings of FGV. 

“Also, FGV’s historical track record in overseas downstream ventures has not been too good, and we see a lack of synergy from the assets. FGV would also need to fund the bulk of the acquisition via debt, which would raise its gearing ratio,” the research house said.