Analysts neutral on Ta Ann’s move to acquire stake in Sarawak Plantation
KUCHING: Ta Ann Holdings Bhd’s ( Ta Ann) proposal to acquire a 30.4 per cent stake in Sarawak Plantation Bhd (Sarawak Plantation) garnered neutral views from analysts.
In its report, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) explained that it is overall neutral on the proposed acquisition as their estimated incremental associate profit before tax (PBT) of RM12.7 million is offset by the increased interest charge of RM6.8 million – implying a core net profit (CNP) increase of two per cent.
“Though we calculate that if Sarawak Plant achieves its three-year high yields, Ta Ann should see higher incremental PBT of RM16.2 million, implying net CNP increase of four per cent,” said the research arm.
With that, it also noted that while Ta Ann’s stake acquisition in Sarawak Plantation is ‘earnings-neutral’, its net gearing is approaching critical levels which could limit growth or lead to potential cash falls for further acquisitions.
“We gather that the rationale for the associate stake is to increase Ta Ann’s exposure plantation exposure, notably to new areas in Niah and Mukah and potentially collaborate for new areas.
“(Ta Ann’s) Management did not rule out an eventual takeover, which is possible considering the acquiring target’s light balance sheet and potential for Ta Ann to raise equity funding further to compete the acquisition.
“We observe that this scenario has similarities with property developer Hua Yuang Bhd’s ( Hua Yang) acquisition of a 31 per cent associate stake in MAGNA.
Despite decent landbank potential, the operational slowdown in Magna Prima Bhd ( Magna) requires Hua Yang to engineer a turnaround.
“Shorter-term investors could not stomach the impact arising from severe earnings reduction from funding the low-return on investment Magna stake and this negatively impacted Hua Yang’s share price,” Kenanga Research said.
For Ta Ann, the research team believed that it could see similar weakness seen as in Hua Yang’s case.
Kenanga Research maintained its ‘ market perform’ call on the stock, pending further guidance on their long-term plans for the Sarawak Plantation stake.
It added, “As noted, we would be negatively biased on a full takeover, and observe limited incremental gains on the associate stake despite increased net gearing.”