By P. Gunasegaram
Tiger’s rambles through the Felda maze uncovers some interesting things and convinces Tiger that Felda Global Ventures is seriously paying too little for Felda Holdings. The ultimate losers will be the Felda settlers and employees, some 230,000 of them, who are the effective vendors.
Tiger never tips a prey off if it is going to hunt it down. Or else the quarry will simply run away. A deer Tiger desires for its occasionally massive appetite never knows what hits it and before it does it is gone.Simple, right? But apparently it is not so for others, especially those who deal in the millions, sorry, billions of ringgit.
Take Koperasi Permodalan Felda Malaysia (KPF) which has agreed to sell all of its 51% stake in Felda Holdings to listed Felda Global Ventures Holdings (FGV) for RM2.2 billion cash. KPF is a cooperative owned by some 230,000 settlers and Felda group employees.
Felda Holdings is a giant of a company. It is the world’s largest producer – not FGV or Sime Darby – of crude palm oil (CPO), accounting for 3.3 million metric tonnes of CPO, or 7% of world production in 2011. It’s turnover is a massive RM19 billion and it employs directly 19,000 people.
Weekly business newspaper The Edge quoted the director-general of the Federal Land Development Authority (Felda) Faizoull Ahmad as having said that KPF will use the proceeds to buy a 10% stake in FGV and use the rest to pay some money back to the KPF members. He added that KPF had already bought some on the open market.
But hang on there! If you are going to buy a 10% stake in FGV, why announce it prematurely? Would not the share price start running even before you start to hunt for the shares? Why reveal that material information now and make it expensive to acquire FGV later?
And then he goes further: “Instead of holding such a large block in a midstream company like FHB (Felda Holdings), we might as well have a stake in the whole streamlined structure, which is FGV itself.”
Tiger vehemently disagrees – with the terms. ROARRRR! First, look at the diagram below to understand how the Felda group operates and how each part of the puzzle fits into the other currently.
Felda owns some 850,000 ha of land with some 480,000 ha allocated to settlers and the rest to FGV under a 99-year lease. Felda owns 39% of FGV which in turn owns 49% of Felda Holdings. Felda settlers, through KPF, own the other 51% of Felda Holdings.
Post the deal, KPF will directly own just 10% of FGV and FGV will wholly own Felda Holdings. Now the crucial question: Is this a fair deal? The key to the answer is valuation of course. Is RM2.2 billion for a 51% stake in Felda Holdings fair? That values the entire company at RM4.3 billion.
Tiger’s deft back-of-the-envelop calculations show it is not. In 2012, according to FGV’s announcement over the acquisition, Felda Holdings made a net attributable profit of RM388 million compared to some RM566 million for 2011. Its net assets or shareholders’ equity amounted to RM4.6 billion.
The RM4.3 billion value for the whole of Felda Holdings is for a start below its net assets of RM4.6 billion which means the acquisition value is a mere 0.93 times assets. Contrast this with FGV – it has net assets of RM6.6 billion and a market value of nearly RM16 billion putting market value at 2.52 times net assets.
Even if FGV pays just two times net assets for Felda Holdings, it values the latter at RM9.2 billion and the 51% stake will have a value of RM4.7 million more than two times the RM2.2 billion it is paying.
Let’s look at it on an earnings basis. FGV’s net profit attributable to shareholders for 2012 was RM806 million. It’s market value is RM16 billion, giving a price to earnings ratio (PER) of 20 times.
Let’s say we use a PER of 18 times – a discount of 10% compared to FGV – on Felda Holdings’ net earnings of RM388 million. That values all of Felda Holdings at RM7 billion (18 X 388) and a 51% stake at RM3.6 billion. This is over 60% the RM2.2 billion that FGV is paying to KPF.
It is as clear as an unpolluted jungle pool to Tiger that both in terms of earnings and assets the price considerably undervalues Felda Holdings. Also, this does not even consider savings that can be made from cost-cutting and improvement in margins.
The current net margin (net profit divided by turnover) on a RM19 billion turnover is a mere 2.0%, which is rather low. If the margin can be improved by a mere 0.1%, the net profit (and valuations) can increase by RM190 million or some 50%. The upside potential is really, really tremendous.
As is commonly known by now, Tiger wants to enter the world of corporate finance to diversify its income base. Tiger wishes KPF had just consulted Tiger before it went into the deal. Tiger would have structured a deal for it in return for 10% of the extra value that can be got. In fact Tiger is still prepared to act for KPF.
Here’s Tiger’s deal, and as the reader you are witness that this appeared here first, lest KPF steals the deal without paying for it.
Instead of selling the entire 51% stake in Felda Holdings to FGV for cash, KPF should have just injected the stake into FGV in return for FGV shares. The ratio of share exchange will simply be the average of the ratios of the earnings and assets of Felda Holdings to those of FGV.
Let Tiger illustrate. Using latest full-year results and latest available figures. FGV’s net assets are RM6.6 billion, Felda Holding’s are RM4.6 billion or 0.7 times FGV’s. FGV’s 2012 net earnings are RM806 million, Felda Holdings’ are RM388 million or roughly 0.5 times FGV’s. The average of the two ratios is 0.6 times ((0.7+0.5)/2)
Simply put, this means Felda Holdings will be valued at 60% the market value of FGV of about RM16 billion or about RM9.6 billion for the share exchange. FGV will therefore make a new issue of shares to the vendor KPFwhich amounts to 60% of its current number of shares.
That will mean that KPF, and 230,000 Felda settlers and employees, will end up owning 37.5% (0.6/(1+0.6)) of FGV shares which is far superior than that ridiculous 10% envisaged under the current deal. It will also mean absolutely no earnings dilution of KPF’s recurrent income of about RM400 million (using 2012 earnings) – in fact there is some earnings enhancement.
Further, any improvement in Felda Holdings’ earnings as a result of integration into FGV and better management will flow through FGV’s earnings to KPF and to Felda settlers and employees.
The increased value for KPF? The 51% stake in Felda Holdings under this deal is worth 4.9 billion (.51 X 9.6) against the currently proposed RM2.2 billion. Value created under this deal is a massive RM2.7 billion (4.9 – 2.2).
Tiger’s fee is just a mere 10% of that or RM270 million. Please bank it into the account of the Tiger Bank no… No, Tiger will invoice separately with appropriate details. Here’s to Tiger’s first corporate finance deal.
GRRRR! ….. or PURRR if KPF bites. And why would it not?
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