Wider network for Tradewinds

What say you on the issue below?

PETALING JAYA: Tradewinds (M) Bhd’s acquisition of a 53.76% stake in Padiberas Nasional Bhd (Bernas) is expected to enhance its earnings, says Standard & Poor’s Research (S&P).

However, the move also raises concern that it would cause Tradewinds’ gearing to surge, the brokerage said.

Tradewinds had, last Friday, said it would purchase 31.52% in Bernas from Hong Kong-based Wang Tak Co Ltd for RM308.4mil and a further 22.24% from Gandingan Bersepadu Sdn Bhd for RM217.6mil.

S&P said Tradewinds’ net gearing would jump to at least 1.7 times from 0.8 times as the sugar manufacturer and palm plantation company would assume Bernas’ liabilities of RM871.6mil and increase its borrowings to fund the acquisition and subsequent mandatory general offer.

For the second quarter to June 30, Tradewinds’ cash, deposits and bank balances stood at RM110.7mil while borrowings was at RM736.18mil.

In comparison, as at June 30, Bernas’ cash and bank balances stood at RM260.65mil while it had RM713.5mil short-term and RM5.22mil long-term borrowings.

S&P said the acquisition would allow Tradewinds to tap into Bernas’ wide marketing and distribution networks in the country and share similar distribution channels, as Bernas was Malaysia’s rice importer and distributor.

“These are expected to increase the productivity and cost efficiency of the enlarged group,” the brokerage told clients in a note.

S&P added that it did not expect any change in the overall business strategy, as both Tradewinds and Bernas would be ultimately controlled by Tan Sri Syed Mokhtar Shah Syed Nor.

Syed Mokhtar, the controlling shareholder of Tradewinds, also has a 30.8% indirect stake in Bernas through Budaya Generasi Sdn Bhd, which is 72.2%-owned by his private vehicle Gandingan Bersepadu.

S&P sees the acquisition price of RM2.08 in Bernas as a fair value. The acquisition price-earning ratio (PER) of about 10 times (based on S&P’s projected earnings per share for 2010) was on par with Tradewinds’ forward multiple, it added.

The brokerage maintained a “hold” call on Tradewinds and reiterated its 12-month target price of RM3, pending the completion of the exercise.

“Post Bernas’ acquisition, we expect Tradewinds to trade at a lower multiple to factor in the increased debt position. The lower multiple will offset the impact of earnings accretion,” it added.

S&P has raised Tradewinds’ net profit forecast for the financial year ending Dec 31, 2010 (FY10) by 25% to 50%, based on the brokerage’s projected net profit for Bernas and after imputing the additional interest cost.

In a separate research note, S&P said Bernas’ margin should remain healthy with the stable global rice price and supply year-to-date.

“Overall demand for rice would remain firm while demand for premium imported rice may improve in tandem with the economic recovery,” it said.

S&P has raised its net profit forecasts for Bernas in FY09 and FY10 by 69.5% and 19.8% to RM92.9mil and RM99.2mil respectively .

It maintained a “hold” call on Bernas with a higher target price at RM2 from RM1.60 previously.