Tradewinds stake sale by FGV may drag returns down
The sale of Felda Global Venture Holdings' 20 percent stake in Tradewinds (M) Bhd may pump even more money into the company's bloating coffers and this may not be a good thing, says RHB Research.
The research house said in a note today the RM57.51 million FGV stands to gain from the sale of its stake to tycoon Syed Mokhtar al-Bukhary yesterday "may start to drag down its returns on earnings" if it is not put to good use soon.
"(The RM57.51 million) will add to its existing net cash pile of RM5.25 billion as at the end of quarter three of 2012.
"We believe that FGV needs to look aggressively for new acquistions to expand on its earnings stream, otherwise its large cash hoard may start to drag down its returns on earnings," RHB Research said.
Additionally, it said, the RM10 million to RM15 million per annum interest it could earn in profits from the sale would only be about a fifth of the associated profits earned from its stake in Tradewinds.
The associated profits are estimated at RM45 million to RM50 million for the 2012 financial year.
RHB Research estimates that the Tradewinds disposal would pull back earnings for the 2012 financial year by up to five percent.
It said FGV was also facing other risks to its earnings, including weak CPO prices, weather abnormality and fluctuations in the exchange rate between the ringgit and the US dollar.
The research house remains neutral on FGV, with a target price of RM4.50, which is below the initial public offering price of RM4.55.
FGV yesterday announced its acceptance of the conditional takeover offer from Syed Mokhtar, via his companies Perspective Lane (M) Sdn Bhd, Kelana Ventures Sdn Bhd, Seaport Terminal (Johore) Sdn Bhd and Acara Kreatif Sdn Bhd, for its Tradewinds stake at RM9.30 per share.
This gives FGV an astounding 165 percent return on the stake that it purchased just three years ago.
The offer is conditional, upon FGV receiving 90 percent accceptance from its shareholders.
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