Leaked report casts doubt on Eagle High’s valuation

This article first appeared in The Edge Malaysia Weekly, on June 19, 2017 - June 25, 2017.
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A leaked 2015 due diligence report on PT Eagle High Plantations Tbk has cast doubt on the Indonesian oil palm company’s current valuation, on top of its deteriorating performance in its financial year ended Dec 31, 2016 (FY2016).

The report, dated July 31, 2015, was prepared by KPMG Deal Advisory Sdn Bhd (formerly KPMG Transaction & Restructuring Sdn Bhd) and was meant for Felda Global Ventures Holdings Bhd’s (FGV) evaluation when it was considering buying a 37% stake in Eagle High for US$680 million.

The report was leaked last week by new website International Palm Oil Monitor. When contacted, IPOM says it is a news portal that covers palm oil and plantations in the interest of good governance, sustainability and community.

“IPOM aims to provide interested parties all they need to know about the industry and promote open and informed discussions between stakeholders. IPOM was launched by a group of professionals from a cross section of the industry,” it tells The Edge in an email.

Dubbed “Project Sunshine”, KPMG’s due diligence report highlighted to FGV several pertinent points on Eagle High’s net assets, potential dividend leakages, financial performance, cash flow constraints and overstatement of land size.

“During the course of due diligence fieldwork, we noted several possible due diligence adjustments that may affect the net asset position of Eagle High, such as potential over-capitalisation of overheads, and interest expenses on immature plantations, plant, property and equipment that were already in use were not depreciated and so on. In the absence of further details, we are unable to quantify the quantum of these possible adjustments,” it says.

Noting that the US$680 million price tag was derived from Eagle High’s planted area of 136,677ha at US$17,400 per planted hectare, the advisory firm nevertheless comments that the number may have been overstated. “Using the information provided by management, we noted a potential shortfall of about 8,000ha,” it says.

Plantation companies in Indonesia are required by the Plantations Act and Ministry of Agriculture Regulation 98/2013 to develop community estates on 20% of the total planted area at the minimum. These are known as plasma areas while the actual land utilised by the companies are known as nucleus plantation areas.

Eagle High’s management explained to KPMG that the potential shortfall computed may not be accurate “as there are planted nucleus areas to be allocated for plasma programmes, pending the formation of plasma cooperatives, which can take up to a few years to complete”.

KPMG also points out that planted areas for certain entities under Eagle High were about 6,000ha more than the land concession because of over-planting, which may lead to land disputes.

The report says FGV should “engage its technical team to identify the exact size (of land) to be removed from the nucleus area hectarage and any shortfall in the nucleus planted areas should be factored into FGV’s valuation”.

It adds that FGV should “seek legal advice to ascertain if the current plasma schemes in place are in compliance with relevant laws and regulations”.

Eagle High’s 2016 annual report shows that the group had a total planted area of 133,457ha as at Dec 31, 2016, in contrast to 136,677ha stated in the KPMG report.

Apart from that, the report says Eagle High faced cash flow constraints that resulted in its delaying payments to certain trade creditors and deferring capital expenditure plans.

It adds that Eagle High’s management said “the group’s actual capex may be deferred due to various factors, including higher costs and insufficient funds”. As for the planned capex for FY2015, management said the group would finance this mainly through new bank borrowings.

“Management said they are currently working on new refinancing plans totalling IDR3.7 trillion from various banks in Indonesia. Considering that successful refinancing would be pertinent to FGV’s assessment of the proposed acquisition, we would recommend that FGV include refinancing of loans as a condition precedent in the sale and purchase agreement. FGV should also assess whether the cash flow model reflects the refinancing plans,” the report says.

Eagle High’s valuation has been controversial since FGV announced its intention to acquire 37% equity interest. However, the deal fell through in December last year.

Shortly after, FGV’s 17.98% shareholder, the Federal Land Development Authority (FELDA), announced that its subsidiary, FIC Properties Sdn Bhd, had signed an SPA with Rajawali Group to acquire the said 37% stake at US$505.4 million (RM2.26 billion).

While FELDA defended the acquisition, critics have argued that the statutory body is paying a substantial premium for the investment, and some have described the acquisition as a bailout of Eagle High, which has been loss-making since FY2015.

In FY2016, Eagle High’s net loss more than doubled to IDR389.75 billion from IDR179.7 billion in FY2015 while revenue declined 5% to IDR2.54 trillion.

The group’s cash and cash equivalents shrank almost 90% year on year to IDR129.37 billion in FY2016 while its total current liabilities were trimmed 38.67% to IDR2.37 trillion.

Last Friday, Eagle High’s share price fell IDR4 or 1.54% to IDR256, giving the company a market capitalisation of IDR8.07 trillion.

This values the stake that FELDA is buying at IDR2.99 trillion or US$224.54 million based on the exchange rate at the time of writing — equivalent to a 55.57% discount to the price offered by FELDA.

Year to date, Eagle High’s share price is down 5.19%. It had closed at IDR270 on Jan 2.