Cover Story: FELDA in the spotlight


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This article first appeared in The Edge Malaysia Weekly, on January 2 - 8, 2017.

 

THE Federal Land Development Authority’s (FELDA) woes seem to be never-ending. For the longest time, the spotlight has been firmly on its 20% associate, Felda Global Ventures Holdings Bhd (FGV), which appears beset with numerous worries — ageing trees, volatile crude palm oil (CPO) prices, a depreciating ringgit, fraud at its Turkish unit — in total, a challenging situation.

FGV was floated at RM4.55 apiece in June 2012 and since mid-2014, its share price has been spiralling downwards, reaching its current level of less than RM1.60, largely as a result of weak sentiment. The company went on an acquisition spree from its listing up to 2015, signing deals that drew much criticism for their high valuations.

FELDA itself has been grappling with incessant politicking as its settlements stretch over 54 constituencies deep in the Malay heartland, which has long been seen as a vote bank for the ruling Barisan Nasional coalition.

With the 14th general election likely to take place this year or at the latest in August 2018, FELDA and its units are bound to attract much attention.

A few weeks ago, the Auditor-General’s Report 2015 revealed that the planning, implementation, monitoring and management of projects by FELDA and its subsidiaries were unsatisfactory. The AG recommended that FELDA plan its procurement and management of projects comprehensively to ensure proper implementation and avoid wastage, and carry out feasibility studies and due diligence before participating in any investment or project, which are the basics of any business.

It is worth noting that FELDA is not on a sound financial footing (see “Agency worse off than before FGV listing”).

Now with its proposed acquisition — its largest to date — of 37% equity interest in Indonesian planter PT Eagle High Plantations Tbk for a whopping US$505.4 million, the authority is likely to continue to hog the limelight. It is paying IDR580 per share for Eagle High when the counter was trading at only IDR298 when the deal was announced.

FELDA is buying the stake from Rajawali Group, which is owned by Indonesian businessman Tan Sri Peter Sondakh, who is said to be close to Prime Minister Datuk Seri Najib Razak.

Such a high price for a non-controlling stake in a loss-making group has become a point of contention. A source close to FELDA, however, reveals that the final quarter of 2016 has been a good one for Eagle High, making it likely that the company will perform from now on.

Responding to its critics, FELDA said enterprise value per hectare, and not share price, was a more accurate measurement — Eagle High’s EV/ha is US$16,000.

It also noted that Sime Darby Bhd concluded the purchase of New Britain Palm Oil Ltd (NBPOL) at an EV/ha of US$27,000 while Kuala Lumpur Kepong Bhd’s planned acquisition of MP Evans, at US$15,500 EV/ha, was rejected by the latter. MP Evans’ independent valuation was US$17,300 EV/ha but the board was looking at US$24,000 EV/ha. MP Evans is also much smaller with a planted area of 31,400ha while Eagle High’s planted area is 125,000ha.

“So FELDA is purchasing access to land four times the size of MP Evans at a lower EV/ha than MP Evans’ independent valuation,” the statutory body said.

FELDA officials, meanwhile, are bound by a non-disclosure agreement with Eagle High, which is listed on the Jakarta Stock Exchange, preventing them from revealing important details that they say would justify the high price.

“There is still the approval from the Indonesian Ministry of Agriculture [yet to be obtained]. This is applied for only after a conditional sales and purchase [agreement] is signed. So, it’s like a chicken-and-egg situation. They (FELDA and Eagle High) have to make an announcement to the stock exchange while they can’t disclose many salient points of the deal,” a source familiar with FELDA’s deal tells The Edge.

He says there are safety nets in place that he cannot reveal but when these are made known, he adds, critics of the deal will see the acquisition price is actually fair. Also, the safety nets ensure that FELDA does not end up with the short end of the stick.

“It’s like a profit guarantee [from Eagle High and Rajawali Group] that secures FELDA,” he says without elaborating.

However, he confirms news reports that FELDA will be getting a loan from the government and that there are guarantees in place to ensure that Eagle High and Rajawali Group perform, and if they do not, FELDA will be compensated. “It’s not as good as a soft loan but it is better than a commercial one. These are the best terms FELDA could get.”

It also does not help that Rajawali Group is said to have acquired Eagle High at a cheaper price (see next page).

Nevertheless, the arguments of both the proponents — for now only a small group of FELDA officials — and the many detractors have their merits.

 

Merits for FELDA

The source familiar with FELDA says the deal is a good opportunity for the government agency, given the lack of available plantation land in the country. Furthermore, the Indonesian government is making an exception by allowing FELDA to buy a chunk of Eagle High.

“It’s difficult to get such a large piece of plantation land — it’s scarce now. This is a long-term investment. Moreover, the Indonesian government seems to be clamping down on the sale of large land banks,” the source adds.

In a news release on Christmas day defending the acquisition, the statutory body said, “This is the last opportunity for FELDA/Malaysia or any other foreign party to acquire an Indonesian company with massive land bank … the Indonesian government made a one-off exception in this deal.”

While Eagle High’s planted area is 125,000ha, its total land bank is more than 400,000ha. Even though the US$505.4 million price takes into account only the 125,000ha that are already planted, the green light has already been given for the planting of some 300,000ha.

The source says apart from palm oil production, Rajawali Group is involved in many other businesses in which FELDA could participate but he refrains from further speculation. “What FELDA and Eagle High are planning now is all very fluid but the main aim is to stabilise CPO prices.”

While Malaysia and Indonesia produce 85% of the world’s CPO, neither has been able to hold sway over its price. It is hoped that with the creation of the Council of Palm Oil Producing Countries (CPOPC) and with FELDA and Eagle High playing a key role in it, the price of the commodity could be steadied.

Furthermore, the CPOPC could put a stop to Indonesian companies undercutting their Malaysian counterparts in selling CPO to China. “The undercutting will end if we have a collaboration with Eagle High. There will be a stop to undercutting, which in turn will stabilise CPO prices,” the source says.

There is also the notion that buying into Eagle High will open up the Indonesian market to FELDA. “There will be a lot of collaborations and cross-selling between potentially new businesses and synergies for FELDA in seedling, fertiliser, CPO trading, downstream, oleochemicals and others,” the source adds.

 

What merits?

Much of the criticism of the acquisition stems from the purportedly high price being forked out by FELDA. A market watcher familiar with the FELDA deal says, “As at 9M2016, Eagle High made a net loss of IDR300.35 billion (RM100 million or US$22 million) and was highly geared at 1.32 times. Thus, I think Eagle High is unlikely to pay dividends for FY2016.

“Assuming that the acquisition is 100% funded by debt and a borrowing rate of 3% of US$505.4 million, the borrowing cost of US$15 million or

RM68 million could eat into FELDA’s cash flow. Simply put, without an underlying cash flow from the investment, FELDA might have to tap its cash flow to pay interest obligations instead of the settlers.”

He disputes FELDA’s contention that share price is not an accepted valuation method. “Share price may not be an accepted valuation method if the buyer acquires a controlling stake, like in the case of KLK’s proposed conditional takeover of MP Evans. Also, the pricing for MP Evans takes into the consideration the location of its estates, next to KLK’s … [similarly] Sime Darby acquired 100% of NBPOL.

“In FELDA’s case, it is not acquiring a controlling stake. Post-acquisition, Rajawali Group would own 37.07% while it would own 37%. In FELDA’s case, it would have little influence and, worse still, it might need to inject funds into Eagle High should the cash flow remain a problem.

“FELDA might report a loss on the investment of as much as RM1 billion or US$242 million if it marked to market the investment. How does FELDA plan to recoup the losses from this investment?” he asks.

He goes on to say that scarcity should not be confused with a purchase with no control and no foreseeable cash flow to service debt obligations.

Also, there is a rule that foreigners with more than 100,000ha of estates in Indonesia are not allowed to expand. This, coupled with the illiquidity of Eagle High’s shares and this being a one-off exception, suggests that FELDA might not be able to divest its investment. Furthermore, has FELDA explored other avenues? Companies such as Sime Darby and Wilmar International Ltd might be willing to part with 37% of their estates, which are profitable, at similar prices.

The source says while Malaysia is a major oil palm player in Indonesia, the republic’s consumer market is dominated by the likes of Wilmar International, Golden Agri-Resources Ltd and Indofood Agri Resources Ltd, and he does not see much synergy. FELDA might face difficulty in implementing any collaborative plans, he adds. “As FELDA’s stake in Eagle High would not be a controlling one, it is unlikely to change Malaysian palm oil companies’ controlling holdings in Indonesia.”

Nevertheless, more details of the deal could come to light as early as next week with some form of response from the Indonesian government. Until then, however, naysayers will continue to cast aspersions on the deal.