JUNE 28 marks the third anniversary of the listing of Felda Global Ventures Holding Bhd (FGV), which was entrusted to carry out the aspirations of the Federal Land Development Authority (Felda). Having the good fortune to list at the tail end of crude palm oil’s upcycle, with the commodity trading at RM3,000 per metric tonne back then, FGV’s listing was touted as a huge success as the stock opened at RM5.39 apiece, or a 19% premium over its retail offering price of RM4.55.
However, that was as good as it got for the stock. A precipitous fall in CPO prices coincided with FGV’s own stock price collapse. The shares closed at RM1.68 last Thursday, June 18 — an all-time low. Excluding dividends paid out, a shareholder who had held on to the shares since the IPO would have lost about 60% of his investment value in FGV (see chart 1).
Matters were not helped by the group’s free-spending ways. Should the latest proposed purchases go through, FGV (fundamental: 1.15; valuation: 1.40) would have spent more than RM7.6 billion on acquisition activities alone in under three years (see chart 2). To put it into perspective, this figure is more than FGV’s current market capitalisation of RM6.12 billion as at June 18.
The group is in a scramble to replenish its landbank with greenfield assets as nearly half of its palm trees are above 20 years of age. Apart from the old trees, it is also encumbered by expense charges that are unique to the group due to ongoing replanting activities as well as its relationship with Felda. FGV’s estimated all-in cost of production is above RM2,000 per metric tonne, by far the highest among Malaysian plantation players.
“The high cost structure is principally due to the land lease agreement (LLA) and its aggressive replanting programme. For the LLA, FGV pays a fixed annual payment of RM250 million plus 15% of plantation operating profits for estates leased from Lembaga Felda. For the replanting programme, the expenses are not capitalised but charged out into its income statement,” says Maybank IB Research regional plantations analyst Ong Chee Ting.
Destruction in shareholder value
One of the major factors that could have caused the stock price decline is the perception that the group has not been prudent with its cash pile after a series of generously priced deals. Another is that FGV has not dedicated ample resources to repairing the nuts and bolts of its operations as it has remained far less efficient compared with its peers.
FGV CEO Datuk Mohd Emir Mavani Abdullah, however, disputes these assertions.
“I do not think it is a fair assessment of the company. We are actively working towards reducing operational costs. We have reengineered our procurement mechanism, for example. By improving this process alone, we can reduce costs by RM100 million a year. We are also divesting non-core assets and streamlining our business portfolio. We are doing a lot.”
A combination of factors has worked against FGV since last year. The massive East Coast floods in December impacted fresh fruit bunch (FFB) production, subsequently causing CPO production to fall. Apart from a sharp drop in sales volume as well as the prevailing weak CPO prices, downstream losses from its Canadian business continues to be a drag on overall earnings.
Following its latest financial quarter in which the group reported a shocking 97% year-on-year decline in net profits, the investment community is beginning to run out of patience. Aside from the cornerstone institutional investors that had borne the majority of the losses, analysts see little reason to improve their rating on the stock until FGV begins reporting a solid improvement in earnings.
“The problem is, earnings improvement will come when CPO prices improve, either that or the group keeps increasing production. It is natural that the current share price reflects the negative sentiment that investors have towards the group,” says an analyst of a bank-backed research house, who has a “sell” call on the stock.
At FGV’s annual general meeting on June 16, an Employees Provident Fund representative protested against the group’s latest and biggest deal to date — the proposed acquisition of a 37% stake in Indonesia’s PT Eagle High Plantations Tbk from the Rajawali Group, plus Rajawali’s sugar project, for RM2.8 billion. Subsequently, in a June 18 filing, EPF ceased to become a substantial shareholder of FGV after disposing of some shares.
Given that EPF was one of the cornerstone investors during FGV’s IPO, the move is viewed as a sign of the fund’s dissatisfaction towards FGV’s inclination to overpay for assets. Emir acknowledges the concerns, noting that FGV is actively working towards assuaging investors’ gripes.
“We will talk to them, and not just EPF. We are going to communicate with all our major shareholders on what is the way forward for the company on a one-to-one basis. The reasons to stay invested are simple: number one is that our strategic and transformation plan will begin to bear fruit. Number two is the bump in earnings that the company will derive in the next couple of years. We have the projections and figures and we will share them with shareholders soon.”
On the other side of the equation, there are also the Felda settlers, who remain unhappy with FGV’s way of doing business with the smaller stakeholders. National Felda Settlers’ Children’s Association (Anak), a group that represents settlers and their families, says that there are serious fundamental problems relating to FGV’s business conduct with the small estate owners.
“The group has not properly managed the smaller associate companies under Felda Holdings Bhd when it took over. Earnings from some of the estates continue to be well below what they should be. We recommend that FGV stops buying these pricey assets and start focusing on renewing engagements with the settlers,” says Anak president Mazlan Aliman.
A political lightning rod
There is no hiding the fact that Felda’s existence is intertwined with local politics. Its settlers, the majority of whom are still from rural areas, have long been a reliable vote bank for the ruling Barisan Nasional government.
According to Anak, some 94,000 settlers hold modest amounts of shares in FGV as a result of its IPO. Apart from losses incurred from the stock’s decline, these settlers are paying about RM50 per month to service loans taken to buy those shares, says Mazlan.
“Just look at the Rompin by-election in May, where Felda settlers voted for the opposition in large numbers, which is something that has never been seen before in Pahang. It is a sign of discontent against Felda and FGV in particular,” he claims.
While BN retained the seat, it did so with a lower majority of 8,895 votes, compared with 15,114 in 2013.
The Eagle High deal has reignited similar political overtones. On June 18, DAP Petaling Jaya MP Tony Pua said in a statement that the Rajawali Group, which is led by Indonesian billionaire Tan Sri Peter Sondakh, will profit greatly from the deal thanks to its ties with Malaysia’s political elite.
“Why is a Malaysian government-linked company helping to enrich an Indonesian tycoon who just happens to be the prime minister’s friend?” he asks.
Emir reiterates that the group is not acting out of political interests and it is working on a purely commercial basis.
“Again, it’s not just about the [Eagle High] plantations. We will also work on how to grow our downstream business in Indonesia — that is where the value is. Rajawali gives us access to the entire consumer market over there. Number two, we will be able to trade their oil, and our trading partnership will be bigger. We are looking at the entire value chain, so the premium needs to be understood.”
FGV assures Felda settlers that the company is in good hands, he adds.
“For the settlers, we say to them, look, you will get dividends every year without fail. The context of the share price is basically the context of the current commodity price. How much lower can it go? As soon as CPO prices come up, the share price will definitely reflect it.”
While sentiment towards FGV may be at a new low, it is worth noting that the group has set out a strategy for turning its business around. Provided that CPO prices are headed towards a new upcycle phase, the group says it can achieve annual revenue of more than RM50 billion by 2020, according to in-house projections.
“As I have said before, the numbers will speak for themselves. We are bringing down the age profile of our trees to 8.5 years from 15 years with the new acquisitions. By 2019, you will see our earnings double or even triple as we will have the right tree profile and our landbank will be big enough,” says Emir.
By 2019, more than 60% of its planted landbank will either be young or prime trees, offering optimal yields from its FFB production, according to FGV.
While Eagle High has young trees, they would not help bring down the overall age profile of FGV’s estates or contribute earnings. This is because with an associate stake of 37%, FGV will not be able to consolidate Eagle High into its books.
Note that FGV will not have control over Eagle High despite having the largest stake in the Indonesian group.
A CIMB Research report on Eagle High Plantations notes that the Rajawali group appears to have a better deal in this transaction.
“This is because with a reduced stake of 31.6%, it can still continue to ‘control’ Eagle High. On top of this, Rajawali group will be able to book a profit from the sale of Eagle High shares at IDR755 per share, most of which we believe were acquired at only IDR400 per share when it subscribed to the rights issue in December 2014,” it said.
Nevertheless, the acquisition will increase FGV’s exposure to estates that are not under LLA. The group has up to 88% of its estates in Malaysia under LLA with the government.
After this deal – the largest since FGV’s IPO — Emir notes that the group’s dealmaking days will largely be over for the time being, giving the group a chance to reassess its value chain and make the necessary cost adjustments.
Nonetheless, it is apparent that the group’s aggressive acquisition spree has cost it some goodwill among shareholders and Felda settlers. In the near term, it needs to prove that it can get its house in order as those outside the company may not share the same aspirations or patience that FGV has in its approach to doing business.
This article first appeared in The Edge Malaysia Weekly, on June 22 - 28, 2015.
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