Cover Story: Will ‘outsider’ Haris succeed in reviving FGV?

This article first appeared in The Edge Malaysia Weekly, on April 22, 2019 - April 28, 2019.

Photo by Suhaimi Yusuf/The Edge

Sources: Company, AllianceDBS, Bloomberg Finance L.P

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IN his modest office in downtown Kuala Lumpur, Datuk Haris Fadzilah Hassan, the recently appointed CEO of FGV Holdings Bhd (formerly known as Felda Global Ventures Holdings Bhd), removes his lanyard, showing it to The Edge in an exclusive interview.

On it are five words — partnership, respect, integrity, dynamism and enthusiasm. When worn, integrity falls on the nape of one’s neck and the first letter of each word spells “pride”. But none of these values is currently associated with FGV.

“I tell them (the employees of FGV) these are good values. We have been pummelled so badly, so we need to get our mojo back,” says Haris.

“Why are we in this position? Because of the integrity issues before. If people were taking integrity seriously in terms of investments, for example, there would have been better due diligence done.”

For its financial year ended December 2018, FGV suffered a net loss of RM1.08 billion on revenue of RM13.47 billion. A year before, in FY2017, it chalked up a net profit of RM130.93 million on sales of RM16.92 billion.

Much of the losses in FY2018 were the result of impairments and provisions, which totalled RM1.04 billion. A significant amount of the impairments came from the acquisition of Asian Plantations Ltd for about RM1 billion — RM628 million in cash and the assumption of RM388 million in liabilities — back in 2014. (See accompanying story, “FGV better off listed”.)

As at end-December last year, FGV had deposits, cash and bank balances of RM1.22 billion, and short and long-term debt commitments of RM3.3 billion and RM991.51 million respectively. For the year in review, FGV forked out RM187.38 million in finance costs.

Haris, who was appointed less than 100 days ago — in late January this year — has the unenviable task of making things right at FGV.

The key performance indicators he willingly shares include strengthening FGV’s share price, thus improving its market capitalisation, and reducing the plantation giant’s gearing ratio, while the rest are regular yardsticks such as cost reduction, watching manpower costs, the divestment of non-core assets and putting in place an anti-bribery management system.

“It’s one of the images of us outside [that there are a lot of bribery and corruption]. Before the end of the year, we will be certified as having an anti-bribery management system,” says Haris.

“The [company’s] fundamentals are strong,” he continues. While he cannot share the profit forecasts, he says FGV’s gearing ratio of 0.75 times in FY2018 is slated to be reduced to 0.68 times by the end of the current financial year.

But the question is, how will Haris — FGV’s fifth CEO since its flotation exercise less than seven years ago — turn around the lumbering giant and get it back on the right track?

 

What the plan entails

Haris has a three-year contract in which time he has to put in place strategies to get FGV out of the rut it is in.

“I was in Sime Darby [Bhd] before, so I’m not afraid of the scale. Immediately before this, I was working on the MRT1 (Mass Rapid Transit Line 1), handling RM31 billion worth of projects, so scale-wise, it (FGV) is not something that I’m afraid of. Look at their fundamentals: they have land, they have plantations — it’s not really rocket science, but you need to get the basics correct. Demand for food will always be there, so in the long term, it’s a positive play,” he explains.

Haris says at present, FGV’s focus is on the upstream business and in fact, 60% of FGV’s crude palm oil (CPO) are sold as CPO while only 40% are processed into other products. This means that the company may have to give out discounts, such as when the tanks at the mill are full and more fruits are coming from the field.

Palm oil keeps for only three to four months before the free fatty acid content starts to increase, so buyers know that they can squeeze companies such as FGV for higher discounts as they would want to make a quick sale.

In contrast, if FGV converts the CPO into cooking oil, its shelf life would increase to more than a year, or possibly even two.

“So, if you convert it (CPO) into another product, you would not be in a hurry, and the value is retained in the product … So, FGV needs to move forward in terms of the downstream business,” Haris explains.

By moving downstream, he is referring to plans to venture deeper into oleochemicals and quality oils through the joint ventures that the company is already in.

It is worth noting that of his nearly six years at Sime Darby, Haris spent the last three years and nine months, from 2008 to 2012, as its head of downstream business.

At FGV, he is also looking at improving efficiency or the utilisation factor at the mills. Costs are higher where the utilisation rates are low. FGV is considering closing down some of its mills and using them as fruit collection centres to bring down costs.

Meanwhile, one of the company’s worries is the oil extraction rate (OER), which is a function of the oil-to-bunch ratio. Its OER is hampered by the fact that only 30% of its fresh fruit bunches (FFB) come from its own plantations, which means it has little control over the 70% of FFB going into its mills. (See accompanying story, “Three options for FGV and FELDA’s LLA”.)

“We can’t control CPO prices, so in the last 100 days, we have been controlling the things we can, which is our costs. If we get our costs to the level that is competitive, when the good times return, we will be in a good position. So, we have been focusing our efforts on driving our costs down,” Haris explains.

His efforts have already started to bear fruit.

Early this year, FGV’s costs were RM1,800 per metric ton of CPO. With the land lease agreement (LLA) charges added — between RM350 and RM400 — the costs were nudged up to about RM2,200 per metric ton.

In a nutshell, this means that if CPO prices were below RM2,200 per metric ton, FGV would likely be in the red.

Now, Haris has managed to bring down the costs from RM1,800 to below RM1,500 for the first quarter of this year. This is actually a big deal, considering FGV produces three million metric tons of CPO a year. Savings of RM100 per metric ton on costs translates into RM300 million in savings, which goes straight into FGV’s coffers.

“It’s all about costs per metric ton … We have reduced our processing costs, we have reduced our costs at the mill, we are making sure we have enough workers, so we can harvest all the fruits, evacuate the fruits as fast as we can, and make sure the OER is good, then we will be as good as the rest (its competitors),” he says.

 

The people factor

However, Haris’ biggest task lies in the handling of the people at FGV. Many of them have heard the same rhetoric of transformation and have seen the last three CEOs all leave abruptly, while they have stayed put.

Then again, FGV until recently had a workforce of 19,000, which was far too large by most standards. In addition, it has 32,000 foreign workers at the plantations. Haris admits that on a cost per hectare basis, the company has too big a workforce.

The recently concluded mandatory separation scheme targeted at staff with medical issues brought down FGV’s staff count to 18,018, and Haris hopes to push the number down to about 17,500 by June. And the big picture involves a reduction in manpower costs by 30% over the next three years.

It is also noteworthy that out of the 19,000 employees, about 10,000 or 53% are in non-executive or junior executive levels.

“It is high — 19,000 [people] for 355,000ha is a bit too much. On a cost per hectare basis, it is high,” Haris comments.

According to FGV’s financials, as at end-December, the company’s administrative expenses amounted to RM925.67 million, down from RM982.3 million a year earlier.

But his biggest challenge with manpower lies not in the numbers but their motivation levels. FGV started from the Federal Land Development Authority (FELDA), and the whole reason for its being was a social agenda. So, while other companies are set up for the purpose of making money, FELDA does not have the same DNA.

It also does not help that the last few CEOs were also looking at transformation, which could lead to what Haris calls “transformation fatigue”.

“To these 19,000 people, you can keep shouting about transformation day in, day out but they know … the people at the top, they come and go. They (the employees) are the only constants.

“So, my biggest challenge is how do I mobilise these 19,000 people to change? Because they have heard all this before, and I am an outsider. For me, coming from the outside, I have to gain their trust. This is the greatest challenge for me,” Haris explains.

Some of the employees, he concedes, have worked in the FELDA environment for many, many years and in 2012, started work at FGV, a public-listed entity, but they have not had a change in mindset.

Haris and those at the helm of FGV are trying to inject a sense of urgency, that FGV is competing commercially and that the company is in competition with other players.

“I’m spending a lot of time on the people side. This coming 23rd [of April marks] my third month here, but I’ve already had 13 town hall meetings. I’m going to meet people on a smaller scale. This needs to be addressed,” he says.

While Haris grapples with the many issues at FGV, the plantation company’s share price hit 63.5 sen in mid-December last year, its lowest since its flotation exercise. Since then, it has risen, closing at RM1.23 last Friday to give the company a market capitalisation of RM4.49 billion.

 

What happened at FGV?

While things may have picked up for FGV, its share price is still much lower than its initial public offering (IPO) price of RM4.45 in mid-2012. At its peak, FGV boasted a market capitalisation of above RM17 billion.

The key problem with FGV was its ageing plantations. FGV’s prospectus in 2012 indicated that 36% of its plantations were between 21 and 25 years and 16.9% were over 25 years, or put another way, almost 53% of FGV’s plantations were regarded as old even seven years ago.

Nevertheless, FGV raised RM4.5 billion from its IPO, selling shares to investors.

Much of this cash has been used up, mainly for acquisitions. In July 2013, FGV acquired Sabah-based Pontian United Plantations Bhd for RM1.2 billion in a deal many thought expensive, with FGV paying RM74,800 per hectare.

In October 2014, FGV acquired Asian Plantations for about RM1 billion, and the acquisition has since been fraught with legal issues. FGV is seeking legal recourse against former directors and the senior management of Asian Plantations for losses suffered due to their failure to discharge their respective fiduciary duties.

Then, in June 2015, FGV acquired four plantation companies and an 836.1ha oil palm plantation in Sabah from Golden Land Bhd for RM655 million cash.

Other than plantations, FGV also invested in Cambridge Nanosytems Ltd, which was supposed to get involved in the production of high-grade carbon nanotubes and graphene from the by-products of CPO.

Many of the acquisitions were frowned upon. The question now is, will Haris be able to change the tide of negative news at FGV and turn things around, or will he be another CEO to leave abruptly from the hot seat?

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