By Xavier Kong
Felda Global Ventures Holdings Bhd has seen blow after blow recently, be it from investor sentiment, or in terms of its results. Can the plantation giant continue to stand firm?
Business model: Incorporated in 2007 as a private limited company, Felda Global Ventures Holdings (FGV) was initially the commercial arm of the Federal Land Development Authority (Felda). On June 28, 2012, FGV listed on the Main Market of Bursa Malaysia with an initial public offering price (IPO) of RM4.55.
Through a network of subsidiaries, associates, and joint ventures, FGV operates in six core business clusters, namely palm upstream and downstream, rubber, sugar, research and development, agri-services, as well as transport, logistics, marketing, and others. In 2014, it announced plans to list up to 15 subsidiaries across these clusters on Bursa over the next few years.
In July 2013, FGV acquired a 95% equity interest in two Indonesian companies, Pt Temila Agro Abadi and Pt Landak Bhakti Palma, for a total purchase consideration of RM44.2 million, adding 21,037ha of mostly greenfield plantations in West Kalimantan to its land bank.
In its 2013 annual report, FGV announced that 8,193ha would be developed for planting oil palm while 12,844ha would be for rubber. It was expecting to spend RM283.6 million over the next five to six years to develop these acquisitions.
The move to Indonesia, Myanmar, Cambodia, and Papua New Guinea was due to the realisation that Malaysia is running short of land that can be used for plantation cultivation.
However, the group did grow its local land bank in October 2013, via a voluntary conditional takeover exercise of the Sabah-based Pontian United Plantation Bhd (PUP) that was completed for RM1.2 billion.
The deal included PUP’s approximately 15,161ha of primarily matured oil palm land in Sabah and Johor, a processing mill, a kernel crushing facility, as well as RM250 million in cash.
FGV’s land bank has grown mainly through acquisitions, as the legacy plantations and Felda land it operates on land lease agreement (LLA) are mature and bring with them liabilities which make FGV unique among plantation players.
Since its listing, FGV has flagged two risks to its business, and these have come to haunt the company on the back of lagging commodity prices in 2014.
The first is its legacy palms, long past maturity. In its annual report, FGV noted that about 53% of its oil palms are past prime age, at more than 20 years old.
With an age profile of 12 years targeted in 2019, FGV has instituted an aggressive 15,000ha per year replanting programme, in addition to acquisitions of plantation land. Long-term investors – very long term – take note.
The second is its 99-year LLA signed with Felda on Nov 1, 2011 (which has since undergone amendments) for planted oil palm and rubber land.
In 2012, based on the agreed leased area, the annual fixed lease amount payable was RM248.48 million per annum together with 15% of yearly plantation operating profit attributable to the land.
This fair value calculations of LLA liability are based on several oft-fluctuating factors: crude palm oil (CPO) price, fresh fruit bunches yield and price, and an implied discount rate. This is what makes FGV so different from other plantation giants and has played havoc with its earnings.
FGV reported its first loss-making quarter since it listed, with a core net loss of RM37 million reported for its first quarter of the 2015 financial year. Not long after that, it was announced that FGV will be replaced by Westports Holdings Bhd as a constituent on the FBM KLCI, effective June 22, 2015.
The plantation giant was selected in December 2012 to be a constituent of the local index, with a market capitalisation of about RM19 billion then. Now, FGV’s market capitalisation stands at about RM7.1 billion. While FGV will be a constituent on the Mid 70 Index, it is shaping up to be not much of a consolation prize.
FGV has also proposed to buy a parcel of land spanning 9,813ha, as well as four subsidiary companies belonging to Golden Land Bhd, for RM655 million in cash, with a total of 8,478ha already planted with oil palms. However, the average age of this parcel is above 20 years. FGV plans to complete the deal by the end of 2015, with the acquisition funded via internally generated funds and borrowings.
Shareholders and management: Felda, which FGV is a part of, is still the largest shareholder at 33.7%. Other major shareholders are Lembaga Tabung Haji (7.8%), Permodalan Nasional Bhd (7.1%), Retirement Fund Inc (5.28%), the umbrella cooperative of all Felda settlers’ cooperatives Koperasi Permodalan Felda Malaysia Bhd (5.8%), and the Employees Provident Fund at 5.74%.
FGV president and chief executive officer (CEO) Mohd Emir Mavani Abdullah was appointed on July 15, 2013 after joining the board on July 11, 2011 and has been serving as the acting CEO since Jan 1, 2013. He received a Chemistry degree from Universiti Kebangsaan Malaysia in 1987 and Master of Engineering Management from University of Warwick, UK in 2000.
Previously, he was a director in charge of National Key Economic Areas of Performance Management and Delivery Unit, in the Prime Minister’s Department. He was also the CEO of Malaysia Petroleum Resource Corp in the Prime Minister’s Department and a director of Malaysia Nuclear Power Corp.
Besides acting as a director of Australian Agricultural Co Ltd, listed on the Australian Securities Exchange, Emir is also a director with several FGV affiliates and subsidiaries, including MSM Malaysia Holdings Bhd, Felda Holdings Bhd, PUP, and Felda.
Share price performance: FGV’s share price has taken quite a hit recently. On June 20, 2014, FGV saw its share price hit a one-year high at RM4.43 – close to its IPO price of RM4.55. However, due to weaker sentiment from its downgrade to the Mid 70 Index, as well as the news of its first loss-making quarter since listing, the stock closed on June 9, 2015 at RM1.88.
What analysts think: Analysts range between positive to neutral with the news of the land parcel purchase. However, there remain some reservations regarding the price tag of the acquisition.
Most analysts have noted that the price of RM655 million, which comes to about RM77,250 per ha, is considered a fair deal as it is comparable to the range of between RM75,000 and RM80,000 per ha for matured Sabah plantation land.
However, RHB IB, AllianceDBS Research, and Maybank IB all noted that the price seems expensive, especially since this pricing is a premium over the PUP acquisition made in 2013, which had a value of RM74,765 per ha. Another comparison was made to the purchase of Unico-Desa’s brownfield land by IOI Corp Bhd, which had a value of RM73,400 per ha.
There were also some mixed opinions on the near-term benefits of this acquisition. While analysts agreed that this acquisition is definitely synergistic, as it plays to FGV’s plantation core, there may be no significant showing for the mature crops compared to the total land bank FGV has, not to mention ongoing weather patterns as well as low CPO prices.
However, as other analysts pointed out, at this time every bit helps, and it is likely to provide an immediate contribution on the deal’s completion in the fourth quarter of 2015. In addition, it may increase the production of FGV by up to 3%, which translates to an up-to-2% hike on its bottom line.
Of note, however, is that the group will be financing the acquisition with a mix of internally generated funds and debt. Kenanga IB noted that, assuming a ratio of 80:20 debt-equity funding, FGV’s net gearing for financial year 2015 could rise up to 0.45 times from 0.37 times.
“While net gearing remains below the comfort levels of 0.5 times, as previously indicated by management, it means that there is less room to land bank via gearing. Any sizeable land banking may require cash calls if the group wants to maintain its comfortable gearing level,” said Kenanga IB.
Earnings forecast:
StockStalk: FGV, as a whole, has taken a few hits lately. Being downgraded to the Mid 70 Index from its strong start, not to mention its first loss-making quarter since its listing, has definitely hurt investor sentiment in the plantation stock, as evidenced by the fall in its share price in the past three months.
However, it should still be noted that, with the stock currently trades at a low of RM1.88, this is a good time for those looking to add a plantation stock to their portfolios. It should also be noted that the loss-making quarter was due to a 20% drop in turnover, largely due to bad weather and floods, along with a 12% decline in CPO prices.
FGV is already moving to rectify the problem of its loss-making Canadian downstream operations, and there really isn’t anything that can be said about natural disasters, is there?
Still, it could be a long time before FGV recovers from the blows it has received, and investors should not look at FGV if what they want are immediate or near-term results. Over the long term, FGV has been restructuring itself towards focusing on its core plantation business, and the planned acquisition in Sabah would certainly help.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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