By Xavier Kong
Rather than aborting the proposal altogether upon deciding that the deal was no longer feasible, Felda Global Ventures Holdings Bhd has decided that it will instead renegotiate the deal with the Rajawali Group regarding the acquisition of a stake in Eagle High Plantations.
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, and transport, logistics, marketing and others.
In June 2015, FGV had announced its intentions to acquire a 37% stake in PT Eagle High Plantations, an Indonesian plantations player under the control of the Rajawali Group. This decision had drawn the ire of analysts, investors, and shareholders alike, due to the belief that FGV is, at US$680 million (RM2.89 billion), overpaying for a non-controlling stake in Eagle High.
However, when Eagle High saw its share price valuation fall to 220 rupiah per share, FGV had announced that it will be reconsidering the proposal, with the hopes that it would be able to negotiate a discount out of Rajawali due to the decline in Eagle High’s share price.
At the end of November, FGV announced on Bursa Malaysia that it will not be continuing with the current proposal to acquire Eagle High, but would instead begin renegotiations in the first quarter of 2016, with the hope of pursuing a different mode of investment in Eagle High, with management guiding that a conclusion would be reached and announced within the first quarter of 2016.
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 (7.78%), Permodalan Nasional Bhd (7.1%), Retirement Fund Inc (5.09%), and the umbrella cooperative of all Felda settlers’ cooperatives Koperasi Permodalan Felda Malaysia Bhd (5.8%).
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 the 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, Mohd Emir Mavani is also a director with several FGV affiliates and subsidiaries, including MSM Malaysia Holdings Bhd, Felda Holdings Bhd, PUP, and Felda.
Share performance: FGV has seen a decline of its share price, with its highest intra-year point standing on Dec 4, 2014, at RM3.06 per share and an intra-year low of RM1.19, on Aug 26, 2015.
While FGV has since rallied in recent times following the completion of the group’s disposal of its loss-making Canadian operations, the stock is now considered overvalued, having closed at RM1.72 on Dec 3, 2015.
What analysts think: Analysts are mixed about the decision to terminate and subsequently renegotiate the deal.
AllianceDBS Research noted that, while lifting the deal from its forecast has lifted earnings estimations and its target price due to the dilution expected from the deal, the involvement of FGV in Eagle High remains a possibility, which leads the research house to believe that FGV has yet to stabilise.
This has led AllianceDBS to maintain a “fully valued” rating on FGV, along with the expectation that the group will be loss making for its financial year 2015, due to management guiding a 3% decline in fresh fruit bunch production in 2016, as well as higher-than-expected operational costs and low to negative trading margins.
TA Securities and CIMB IB have noted that they are positive on the development, with CIMB IB noting that there is no penalty to FGV if it walks away, considering the deposit has yet to be paid due to a lack of the necessary approvals. This also allows FGV to step away from an earnings-dilutive deal and avoid straining the balance sheet, according to TA.
CIMB IB is also of the opinion that the chances of there being a further collaboration between FGV and Eagle High are slim, unless there is a strong rally of either crude palm oil prices, or the financial performance of Eagle High.
PublicInvest Research noted that FGV is currently considering gearing up its balance sheet to finance the new Indonesian deal, with the targeted gross gearing level at one to one. This comes at a time when, as of the group’s third quarter of financial year 2015, FGV has a cash pile of RM2.1 billion, with total borrowings at about RM5.1 billion. The group’s current nett gearing stands at about 33%.
PublicInvest also opined that the timing for any further Indonesian deal would be wrong, as valuations would not be more attractive due to stronger crude palm oil prices in 2016, as well as the pressure being faced by the ringgit. These conditions speak against the deal at this juncture.
Analysts noted across the board that the reason for the low recommendations stands at the earnings concerns of the group, with research houses considering the stock overvalued and underperforming.
Earnings forecast:
StockStalk: While expanding into Indonesia through Eagle High would enable FGV to unlock further potential from its holdings in Indonesia, there remains the matter of the cost that would be borne by the group through this expansion, and whether or not the returns would be worth it.
As it stands, FGV’s share price has fallen almost 50% in the last 12 months, comparing the group’s close of RM1.72 on Dec 3, 2015, and the group’s close of RM3.06 on Dec 4, 2014. Even so, the price of RM1.72 has been remarked as overpriced by research houses, with concerns about the group’s expected lower production in 2016, as well as the group being loss making at this time.
El Nino has also played its part on palm oil players, offering dry spells that do nothing to aid in production, but happen to do wonders to crude palm oil prices. This may in turn raise valuations for Eagle High, as the palm oil produced by the company grows in value, denying FGV its bargaining position of acquiring Eagle High while its share price is low.
However, with the ringgit also facing severe pressure, as well as the consideration being transacted in the stronger US dollar, any discount that FGV might be able to negotiate might very well be offset by foreign-exchange alone. FGV is also already looking at depleting cash reserves.
As it now stands, FGV, in not providing any detail about the renegotiation, might well turn investor sentiment against itself, especially after the selldown by shareholders when the proposal was first announced.
The stock, as it is, remains one that faces two large obstacles, the old average age of its trees, as well as the matter of a constant payment to Felda for the use of its land. Investors are cautioned to think thrice when buying into FGV, unless it is for the short term. As usual, the decision – and consequences – lie with the investor.
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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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