This article first appeared in The Edge Financial Daily on November 29, 2018

KUALA LUMPUR: FGV Holdings Bhd, which undertook its biggest impairment from the 2014 acquisition of the London-listed Asian Plantations Ltd (APL) in the third quarter ended Sept 30, 2018 (3QFY18) and saw it take legal action against 14 former directors recently, has moved into recovery mode, its chairman and interim chief executive officer (CEO) Datuk Wira Azhar Abdul Hamid said.

Likening the loss-making plantation giant’s conditions to a patient undergoing a heart bypass, Azhar said it had “cleared the blockages” and is now “closing up the stitches”.

“We are starting to see the early signs of [a] turnaround and the teams are working very hard to rectify the situation ... hopefully, the ‘patient’ can recover and run around in [good] health soon,” he told a news conference to announce the group’s financial results for 3QFY18 yesterday.

On Nov 23, FGV sued its former group president and CEO Datuk Mohd Emir Mavani Abdullah, former chairman Tan Sri Isa Samad, and 12 others for RM514 million and other damages in relation to the acquisition of APL in 2014.

Azhar said the group will file one or two more suits in relation to its subsidiaries that are currently under investigation by the end of the year, but he declined to elaborate.

“We have done the big one [impairment of] APL, which is being taken through the legal process currently. For the others, you should be hearing the same for one or two more before the year ends.

“I’d rather not name names. We will announce it at the right time,” he said.

Azhar said the RM514 million claim was based on the group’s loss from the acquisition of APL, which was independently verified by valuers.

While it would be more ideal for the impairment to be carried out earlier, he said the group wanted to be sure of its financial position.

“We wanted to be sure, which was why we carried out all the investigative work. We are relatively sure of the numbers now and have chosen this quarter to put the impairments through. The biggest one, APL, has been finalised and confirmed,” he said.

But he assured that the worst of the impairments is over.

FGV widened its net loss to RM849.26 million for 3QFY18 from RM23.23 million for 2QFY18 and versus a net profit of RM41.53 million a year ago, mainly due to impairments amounting to RM788 million, with APL accounting for 65% or RM513 million of the total impairments for the current quarter.

Other impairments included RM53 million for the acquisition of FGV Cambridge Nanosystems Ltd, RM1.22 million for the acquisition of two units of Troika condominiums, and RM102 million for FGV Green Energy in 3QFY18.

The group’s quarterly performance was also dragged down by the plantation sector, which incurred a loss of RM849.8 million for 3QFY18 compared to a profit of RM132.4 million a year ago.

FGV attributed the poorer performance to a lower average crude palm oil (CPO) price realised, and impairments of intangible assets of RM562 million and property, plant and equipment of RM124 million.

The group saw a higher share of losses from joint-venture companies amounting to RM60 million for 3QFY18. These factors were compounded by weak margins of the research and development division, and the lower sales volume of fertilisers.

As a result, FGV reported a loss per share of 23.3 sen for 3QFY18, compared to earnings per share of 1.1 sen for 3QFY17.

Quarterly revenue also declined 22.9% to RM3.19 billion for 3QFY18 from RM4.14 billion a year ago.

For the cumulative nine months (9MFY18), the group posted a net loss of RM871.15 million compared to a net profit of RM80.49 million a year ago, while revenue fell 19.2% to RM10.23 billion from RM12.67 billion for 9MFY17.

CPO outlook is bearish

Asked if FGV would be able to weather through prolonged weak CPO prices given its current financial situation, Azhar said it will focus on rationalising its costs via the improvement initiatives that are already in place.

The average CPO price realised in 3QFY18 was RM2,224 per tonne, 16.5% lower than the RM2,665 per tonne in 3QFY17.

FGV expects CPO prices to average between RM1,900 and RM2,100 per tonne for 2019, with Azhar saying that he does not expect any significant improvement in CPO prices based on the current outlook for demand and supply.

Nevertheless, he does not expect low CPO prices to significantly affect the group’s financial performance going forward.

“Although we have taken a big hit from a profit perspective, we are still doing okay from a cash perspective. Our cash flow should still be good and to me, that is more important.

“We are confident [of a recovery for FGV]. We know the issues we are facing and we are addressing them. We are already seeing some improvements with the initiatives we are taking,” he said.

FGV’s deposits, cash and bank balances stood at RM1.48 billion as at Sept 30, 2018.

On the appointment of a new CEO for FGV, Azhar said the group should be making an announcement by the end of January 2019, adding that there will also be a new chief financial officer, possibly before the appointment of its CEO.

“With a new leadership line-up in place, the board of directors is confident that FGV will be able to turn the tide in its favour,” Azhar said in a separate statement yesterday.

“FGV continues to focus on correcting its age profile, which at the time of listing was among the worst in the industry with 53% of its trees classified as old. This is an expensive commitment, but we have no choice. The old trees need to be replanted,” he added.

He noted that the group had also identified 11 non-core investments for divestment in the future. “This will allow management to focus on core operations to create and extract greater value for shareholders.”

While the group anticipates that 2018 will close on a negative note, there are nascent signs of operational recovery which are indications of a more positive future. “With the measures, we project a much better upstream achievement of 20 tonnes per hectare and a much reduced ex-mill cost of RM1,600 in 2019,” Azhar added.

FGV shares closed down 8.5 sen or 8.5% at 91.5 sen yesterday, bringing it a market capitalisation of RM3.36 billion. Year to date, the share price has nearly halved from RM1.80 on Jan 2.