HSP’s proposed acquisition of Kretam a short-term dilution but long-term benefit

KUALA LUMPUR: Hap Seng Plantations Holdings Bhd’s (HSP) proposed acquisition of Kretam Holdings Berhad (Kretam) could mean extra expenses for HSP but analysts believe that the acquisition could also open up possible synergies in the long run.

In a filing on Bursa Malaysia, HSP announced that it has proposed to acquire a 55 per cent stake in Kretam for a cash consideration of RM1.18 billion.

According to HSP, the acquisition could increase HSP’s total plantation land bank and planted area by 23,865 hectares or by 59.2 per cent and 19,623 hectares or 54.3 per cent, respectively.

Kenanga Investment Bank Bhd’s research arm (Kenanga Research) said, “We are short-term negative on the deal, as the incremental earnings contribution of circa RM45 million per year would fail to offset additional interest cost of circa RM50 million to RM100 million per year, depending on the final acquired stake.”

It pointed out that the proposed purchase price implies a huge forward price earnings of of 77-folds, far exceeding the small cap average of circa 18-folds.

“We estimate that HSP’s net gearing post-acquisition could jump to 0.5 to one-fold, severely limiting expansion capabilities of the company should this deal go through,” it warned.

“Valuation-wise, we calculate an enterprise value (EV) per hectare of RM92,800 and EV per planted ha of RM112,800 for the landbank, which we consider in line with the average EV per planted ha of integrated planters at RM103,100.”

“However, we note the relatively low utilisation of Kretam’s refineries at only 10 to 20 per cent of full capacity, which explains the losses seen in the downstream division,” it added.