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This article first appeared in The Edge Financial Daily, on December 29, 2016.

 

KUALA LUMPUR: More questions are being raised on the rationale for the purchase of a 37% non-controlling stake by Federal Land Development Authority (Felda) in Indonesia’s PT Eagle High Plantations Tbk as there would be no unlocking of value for Felda. In fact, the US$505.4 million or RM2.26 billion investment should be spent on Felda’s locally listed arm Felda Global Ventures Holdings Bhd (FGV).

“Felda is not acquiring a controlling stake in Eagle High [and] it cannot effect a mandatory general offer. As a result, Felda cannot derive synergy from the buy unlike Sime Darby Bhd’s acquisition of New Britain Palm Oil Ltd (NBPOL).

“Since there is no asset [but] only a stake, Felda cannot unlock the value from this exercise,” an analyst with a local bank, who declined to be quoted, said.

The analyst added that the acquisition at US$505.4 million by Felda’s FIC Properties Sdn Bhd (FICP), which is more than double the average share price of Eagle High, is a significant premium and therefore “too pricey” for a loss-making company.

The analyst told The Edge Financial Daily via telephone that FICP’s buy at 580 rupiah (19 sen) per share is expensive and it would take Felda a “long time” before it can reap profits partly because the shares are illiquid.

“According to Eagle High’s financial results for [the] first nine months of 2016, it made a loss. The cost of 580 rupiah per share is more than 100% of the average share price. Eagle High’s share price would have to double before Felda’s investment can break even.

“That is the only way I see Felda benefiting from the acquisition because it has no control over the management. It might be looking to benefit through dividends with crude palm oil (CPO) price surging beyond RM4,000 per tonne.

“However, the prospect [of that happening] at this moment is not likely. It will be a long time before Felda sees any benefit,” the analyst said.

Last Friday, FICP inked a sale and purchase agreement with PT Rajawali Corp to acquire the stake in Jakarta-listed Eagle High, which is also one of Indonesia’s largest palm oil companies.

Eagle High, which is 74.07% owned by PT Rajawali, saw net loss widen to RM100 million in its nine months ended Sept 30, 2016 (9MFY16) from RM27.4 million last year due to weak fresh fruit bunch (FFB) production and sizeable interest expenses while revenue dipped 22.5% to RM532.7 million compared with RM685.8 million in 9MFY15.

According to filings with the Indonesia Stock Exchange, the company suffered a net loss of RM60 million on higher revenue of about RM900 million in its financial year ended Dec 31, 2015 (FY15) versus RM63.1 million net loss and RM765.7 million revenue in FY14.

Asked if the acquisition constituted a “bad call”, the analyst said the question should instead be why Felda was “desperate” to buy a stake in Eagle High.

“The investment by Felda was better spent on FGV which has a lower enterprise value per hectare (EV/ha).

“This is a decision made by a government entity [so] they must justify the desperate need for this acquisition,” the analyst said.

To recap, in a seven-point frequently asked questions (FAQs) response last Friday, Felda said the deal will improve Felda’s crop profile as the average age of Eagle High’s trees is seven years versus Felda’s 15 years.

“There would be a lot of collaborations and cross-selling between Felda and Eagle High. Potential new businesses and synergies for Felda Group in seedling, fertiliser, crude palm oil trading, downstream/oleochemical, and potential entry to the vast Indonesian market of 260 million people for Felda Group’s finished and consumer products,” Felda said.

Meanwhile, PT RHB Securities Indonesia analyst Hariyanto Wijaya opined that Felda’s acquisition price at 580 rupiah per share versus the current price of 298 rupiah and potential earnings recovery could be a catalyst for unlocking Eagle High’s share price.

“We met with its investor relations personnel last week and the management estimates its FFB production in the fourth quarter of 2016 (4Q16) and FY17 to grow by 12% year-on-year (y-o-y) and 30% y-o-y, respectively.

“They also guided on continued production recovery since September, and that the current CPO price level should enable Eagle High to book positive earnings in 4Q16. We do not have a rating on the stock. At current EV/ha of US$10,069, it is trading at the lower range of our plantations universe,” he said in a sector note on Tuesday.

Hariyanto added that in 2016, about 73,167ha or 64.5% of Eagle High’s nucleus matured plantation of 113,432ha was in the increasing FFB yield phase (aged four to eight years).

The alleged expensive acquisition has been the subject of controversy among several quarters including CIMB Group Holdings Bhd chairman Datuk Seri Nazir Razak, opposition politicians and researchers.

Among their criticisms, they claim that Felda should not validate the soundness of the purchase on the basis of EV/ha as it did not own a controlling shareholding in Eagle High.

PKR policymaker Mohd Rafizi Ramli told a press conference yesterday that Felda was using EV/ha justification on the basis of how much value one can get from planted acreage.

“Felda reasoned that it is almost impossible to find huge acreage of that size in Indonesia because nobody is going to sell. Now, firstly, you are not in control of Eagle High Plantations, Felda plans to buy a 37% stake at exorbitant price, yet at the same time it does not have the controlling stake.

“When you don’t have a controlling stake, it is rather ridiculous to have access to huge acreage of plantation. Value can only be added when there is synergy through a controlling stake,” he said.

According to reports, PT Rajawali founder Peter Sondakh will retain a controlling stake in Eagle High.

In its FAQs response, Felda stated Kuala Lumpur Kepong Bhd’s recent final offer of US$15,500 EV/ha rejected by MP Evans Group plc’s board of directors was valued by MP Evans’ independent valuers as US$17,300 EV/ha.

“MP Evans asked for valuation of US$24,000 EV/ha for the company. [However,] at US$505.4 million, Felda is purchasing the Eagle High stake at US$16,000 EV/ha,” Felda said, adding that MP Evans’ planted land is 31,400ha while Eagle High’s planted area is 125,000ha.

“Felda is purchasing access to land four times the size of MP Evans at a lower EV/ha than MP Evans’ independent valuation,” Felda said while noting that Sime Darby’s purchase of NBPOL was at an EV/ha of US$27,000.

To this, Mohd Rafizi said Felda should talk about the synergistic value it can get from the acquisition that can put it or FGV in a game-changing position against its competitors.

“Buying 37% at that exorbitant price and not even able to consolidate Eagle High’s results into Felda, is just madness. So what will happen is Felda will continue to show a weak balance sheet, so it is pointless to talk about the EV[/ha] because you can’t consolidate.

“Similar to what is happening now where Felda can only take dividend [although] its top results and balance sheet are still weak but with additional RM2 billion debt [due to the acquisition], with no result to show apart from the dividend every now and then.

“Therefore, don’t even begin talking about EV[/ha] because it is only relevant when you have control to do with all those acreage you get,” he said.

Meanwhile, Bernama has reported that Felda’s decision to acquire a stake in Eagle High was vital to its progress as it had reached a stage where it needed to reinvent itself after six decades in the industry.

Felda director-general of management Muzamil Mohd Nor said failing to do this would mean Felda would remain stagnant, while others in the global palm oil sector were moving forward.

Expounding the rationale behind the transformative deal, Muzamil said the deal was strategically too important to pass up as it would make Felda one of the biggest global palm oil plantation companies.

“If we don’t do this deal, we will just be on the sidelines, being forced to watch our competitors grow by leaps and bounds in this highly lucrative sector,” he said in an interview yesterday.

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