Synergy seen rising 6-7% on market debut

SHARES in Malaysia’s Synergy Drive, whose interests range from palm oil to engineering, could rise 6-7 per cent on their debut on Friday, but plans for big investments beyond its core businesses may saddle it with debt, clouding its outlook.State-controlled Synergy Drive, formed from a merger of conglomerate Sime Darby and two other planters, Golden Hope and Kumpulan Guthrie, has profited as prices of palm oil, used for food and fuel, have more than doubled since January 2006.The company, valued at more than US$16 billion, will be Malaysia’s biggest listed firm and the world’s second-biggest planter by value after Singapore’s Wilmar International Ltd, which is worth US$18.2 billion.But some analysts are concerned that plans to invest up to RM21 billion (US$6.24 billion) to take 60 per cent stakes in the mammoth Bakun hydroelectric dam and the construction of undersea cables may place the debt-free Synergy under financial strain.“People are a little worried about Synergy Drive’s taking a stake in Bakun,” said a fund manager, who declined to be named.“Without Bakun, Synergy would have had a sterling debut, but now we think it’s going to be muted: Perhaps 6-7 per cent up, but definitely less than 10 per cent. Their getting involved in non-core assets is worrying.” Synergy’s shares will start trading at RM8.90, or about 21 times current year earnings, in line with the broader Kuala Lumpur Composite Index.The price is at a generous discount to pure-play plantation company IOI Corp Bhd, which trades at almost 26 times earnings and Wilmar, at 31 times.“Synergy Drive is not a pure-play plantation company so you can’t compare it with IOI or Wilmar,” said OSK Research analyst Tursina Yaacob, who has a 12-month price target of RM13.65, or around 29 times fiscal 2008 earnings.“We like the management and its shareholder, (state asset firm) Permodalan Nasional Bhd, and we think there will be investor interest because it’s a core heavyweight holding.” Synergy Drive had net profit of RM2.63 billion on sales of RM28.22 billion in the year to end-June, according to proforma accounts in its sale prospectus.Synergy gave no forecasts, but OSK Research estimates fiscal 2008 net profit will rise 5 per cent to RM2.75 billion.The firm has said it is aiming for an improvement of as much as RM500 million in earnings before interest and tax annually from July 2009, with an estimated 80 per cent of the cost and revenue synergies coming from the plantation unit.