Indonesian land buy unlikely to impact Southern Acid’s profit

TheEdge Tue, Apr 02, 2019 11:15am - 4 years View Original


Southern Acids (M) Bhd
(April 1, RM3.81)
Maintain underperform with an unchanged target price (TP) of RM2.50.
Southern Acids (M) Bhd (SAB) announced the acquisition of two parcels of leasehold land with a total area of 3,570 sq m in Riau, Indonesia for 6.52 million rupiah (RM1.83 million). The acquisition has immaterial impact on SAB’s earnings and balance sheet, with no change to forecasted earnings for financial years 2019 to 2020 (FY19-20E) with a core net profit  (CNP) of RM21.5 million to RM26.1 million.

SAB announced that its 63%-owned indirect subsidiary PT Mustika Agro Sari (PTMAS) has entered into sales and purchase agreements with Herry Amin, a director of PTMAS, with a 5% shareholding in the Indonesian company, for the two parcels of land. The acquisition cost will be fully funded by SAB’s internally-generated funds. The consideration is in line with the appraisal by valuer Ecovis International.

We were not surprised with the announcement given that the two smallish parcels of land acquired are for an office complex and future expansion, which is part of SAB’s annual capital expenditure (capex) for business operations. While there is not much information from management on the use of office complex, we reckon that it would be for their Indonesian operation. As for the balance sheet impact, there is a minimal impact on its substantial cash reserves of RM188.9 million as at Dec 31, 2018.

We maintain our earnings expectations as we expect immaterial impact on SAB’s earnings. The acquisition will form part of our assumed annual capex of RM26.1 million to RM17.6 million for FY19-20E.

The TP of RM2.50 is based on sum-of-parts (SoP) valuation based on the average of FY19-20 earnings per share (EPS) of 17.4 sen. In our SoP valuation, we maintain our average forward price-to-earnings ratio (PER) of 13.5 times, applying a 25% discount to upstream segment to reflect the challenging near-term cost environment. Meanwhile, we maintain the oleochemical segment at 11.0 times forward PER (average of small-mid cap planters), ascribing 40% discount to the forward PER to account for its challenging business prospect. For healthcare division, we maintain our assumptions with unchanged 18 times PER as well as our conglomerate discount of 15% to arrive at our SoP TP of RM2.50. Our TP implies a forward PER of 15.9 times, which is -0.5 standard deviation of three-year average which is considered generous given the group’s volatile earnings delivery.

Risks to our call include: (i) higher-than-expected crude palm oil (CPO) prices, (ii) lower-than-expected cost of production, and (iii) higher-than-expected CPO output. — Kenanga Research, March 29

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