This article first appeared in The Edge Financial Daily on June 8, 2017

Felda Global Ventures Holdings Bhd
(June 7, RM1.66)
Downgrade to reduce with a lower target price of RM1.45: Felda Global Ventures Holdings Bhd’s (FGV) board of directors announced that its group president/chief executive officer (CEO) Datuk Zakaria Arshad and chief financial officer (CFO) Ahmad Tifli Mohd Talha were given leave of absence commencing on Tuesday pending investigation into certain transactions under Delima Oil Products Sdn Bhd (DOP), a 72%-owned subsidiary of FGV. We gather that Ahmad Salman Omar (CEO of FGV Trading Sdn Bhd) and Kamarzaman Abd Karim (senior general manager of DOP) were also suspended.

In the interim, a board executive committee, comprising FGV directors Datuk Dr Omar Salim and Datuk Mohd Zafer Mohd Hashim, and head of logistics cluster Azman Ahmad will take over the responsibilities of the group president/CEO. The board also appointed Aznur Kama Azmir, financial controller of plantation sector, as the interim group CFO.

We understand that the issue that led to the suspension of FGV’s CEO and CFO was the late payment of receivables from its customer Safitex to DOP. This resulted in FGV recognising impairment of receivables of RM29.6 million in the first quarter of financial year 2017 (1QFY17). The impaired amount accounted for only 0.2% of FGV’s total revenue in FY16.

The CEO in a media briefing explained that he earlier refused an alleged instruction from FGV’s chairman to resign from the company on May 31. He added that he did not breach corporate governance practices to allegedly allow Safitex to purchase palm products without a letter of credit, which reportedly resulted in the delayed payment. He indicated that Safitex had been a long-term business partner of FGV.

In a press briefing, the FGV board led by its chairman Tan Sri Mohd Isa Abdul Samad said that the group is carrying out its own internal audits of the alleged irregularities in certain transactions between DOP and Safitex. This could lead to the issuance of “show-cause” letters to the CEO and others to explain the matter. He added that the CEO will remain suspended until the investigation is completed and no timeline was provided.

The news came as a negative surprise to us. We are of the view that the suspension of the CEO and CFO for an indefinite period of time will negatively impact the performance of FGV as it will lead to uncertainties with regard to its future direction. FGV under its current CEO has been successful in cutting costs and improving its plantation performance through better agriculture practices which were partially reflected in 1QFY17. — CIMB Research, June 6