This article first appeared in The Edge Financial Daily, on November 19, 2015.

KUALA LUMPUR: Felda Global Ventures Holdings Bhd (FGV) will decide on the final price for its proposed acquisition of Indonesia-based PT Eagle High Plantations Tbk once it receives the due diligence report by end of this month, taking into account the depreciation of the ringgit against the US dollar, as well as the level of crude palm oil (CPO) price.

In an interview with The Edge Financial Daily yesterday, group president and chief executive officer (CEO) Datuk Mohd Emir Mavani Abdullah said the group will negotiate the acquisition price based on the findings of the report.

“In any asset that you buy, the final price will be dependent on the due diligence report, and we should expect it by end of this month. We will make an announcement,” he said.

Mohd Emir said he is aware of market concerns regarding the stake that FGV (fundamental: 1.15; valuation: 0.8) is buying into, and that some analysts believe that the price is on the high side.

FGV announced on June 12 that it had entered into a heads of agreement to acquire a 37% stake in Eagle High from PT Rajawali Capital International for US$680 million, of which US$632 million will be paid in cash for a 30% stake, while the remaining 7% stake will be settled via an issue of 95 million new FGV shares.

FGV also said it would buy an equity interest of between 93.3% and 95% in Rajawali’s sugar project for US$67 million.

The total acquisition price of US$747 million translated into RM2.8 billion at the time the deal was announced.

The proposed deal has come under scrutiny for its structure and the high premium that FGV will be paying for a non-controlling stake in Eagle High.

The proposed acquisition price of 775 rupiah (24.5 sen) per Eagle High share is at a 72% premium to its last closing price of 450 rupiah per share on June 12.

“If you take into account the enterprise value (EV), it is still cheaper than [that of] the Malaysian plantations,” Emir explained.

Soon after the proposed acquisition was announced, FGV defended the deal in a statement, saying that the proposed implied equity value per hectare (EV/ha) for the planted hectarage of controlling shareholder Rajawali Corp is approximately US$17,400 per ha — lower than the recent transactions involving New Britain Palm Oil Ltd (EV/ha of US$25,900) and Unico-Desa Plantations Bhd (EV/ha of US$23,500).

He added that the group will take into consideration the depreciation of the ringgit as well as the CPO price when negotiating with High Eagle.

“What matters is the CPO’s long-term price, and not so much the fluctuation of the ringgit.

“For overseas investments, everything is paid in US dollars. CPO is sold in US dollars, and our cash flow is also in US dollars,” Mohd Emir said.

Note that since the proposed acquisition was announced, the ringgit had weakened 17.21% against the US dollar to 4.389 yesterday.

Based on the latest exchange rate, the US$747 million price tag would cost RM3.28 billion.

FGV had hoped to complete the deal by September, but it announced on Oct 30 that the due diligence had been extended to Nov 30.

Asked about the group’s underperformance, Mohd Emir attributed the recent decline in net profit growth to the drought and flood that swept the country last year, as well as the profiling of its ageing trees.

“We have 53% old trees compared to [that of] our peers, and the plantations that we bought have not reached the optimum level,” he said.

The group targets to replant 15,000ha every year and has managed to replant 60,000ha to date.

However, Mohd Emir said the group will reap the benefits of the new plantings in 2018 when the palms start to bear fruits.

“You cannot go wrong with replanting, and if my prediction is right, the CPO price will recover just in time when FGV’s prime comes in 2018,” he said.

The group is targeting to have 30% of its palms in the prime age by 2020, and an optimal level of 40% by 2025. Its current prime palms stand at 14%, according to Mohd Emir.

Mohd Emir declined to comment on whether he would renew his tenure at FGV, emphasising that the group’s transformation programme is already in place.

Mohd Emir was appointed group president and CEO on July 15, 2013 under a two-year contract with an option to extend another year.

There had been speculation that Mohd Emir would be replaced when his contract was up in July this year. However, FGV responded to media reports on the matter by saying that Mohd Emir “is still the group president and CEO”.

Touching on Prime Minister Datuk Seri Najib Razak’s recent call for government-linked companies to bring back their investments abroad to Malaysia, he said that as a plantation company, there is no choice, but to expand to overseas market.

“Especially with the land bank scarcity in the country, and now Sarawak has a policy of no more palm oil, while Sabah is going for the single sustainability approach.

“Where else would we go? If you invest in Malaysia, you are going to pay the price for it,” he said.

Year to date, FGV’s counter has fallen 16.87% to yesterday’s close of RM1.77.