KUALA LUMPUR: CIMB Equities Research is slightly negative on Ta Ann’s plan to purchase a stake in Sarawak Plantation Bhd
(SPB) in the short term.
The research house said Ta Ann, had during a briefing, indicated plans to raise its stake in SPB, resolve SPB's encumbered land issues and expand into downstream (refinery).
“However, we would turn more positive if Ta Ann is successful in raising fresh fruit bunches (FFB) yields of SPB's estates in the longer term and resolve its encumbered land issues.
“Maintain Hold and TP of RM3.85. Upside risks are better timber contributions, while downside risks are lower crude palm oil (CPO) prices,” it said on Wednesday.
To recap, on Jan 11, Ta Ann announced its plans to acquire a 30.39% stake in SPB for RM169.9mil (or RM2 a share).
Ta Ann chairman and major shareholder Datuk Amar Abdul Hamed is also a major shareholder in SPB (via Cermat Ceria). This acquisition is in line with Ta Ann plans to expand its exposure to the plantation business.
“We gathered that Ta Ann plans to improve the FFB yields of the SPB estates to boost future FFB output. The group also plans to resolve SPB’s encumbered land issues (given its previous experience in negotiating with the local natives) as well as improve SPB's ground operations, especially in the peat estates,” it said.
CIMB Research said the acquisition will also bring Ta Ann closer to its internal target of achieving 100,000ha of planted area in the next few years (c. 50,000ha as at December 2016).
The research house said the group did not indicate specifically how it plans to fund the acquisition but it estimated that the acquisition was likely to be earnings neutral for Ta Ann as it estimated the additional share of profit contribution from SPB will be offset by higher borrowing costs to acquire it.
Ta Ann’s gearing ratio could rise from 22.8% as at end-September 2017 to 35%, assuming that the acquisition is fully funded by bank borrowings.
“Furthermore, we think that if Ta Ann were to raise its stake in SPB further to more than 50% (or controlling stake) it could be short-term cashflow negative for the group as it may need to fork out more capex and expenses to replant older estates and improve the operations of SPB estates over the next few years, i.e. higher fertiliser application and improve facilities," it said.
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