KUALA LUMPUR: Felda Global Ventures Holdings Bhd (FGV), whose declining fortunes have come into focus of late, has been urged to be more focused and prudent in its merger and acquisition (M&A) activities, in addition to continuously improving its operational efficiency.

FGV’s (fundamental: 1.55; valuation: 1.4) share price has plunged by 53.85% from its offer price of RM4.55 in its initial public offering (IPO) in 2012. Earnings have also been on the decline due to various factors, including low commodity prices, primarily crude palm oil (CPO), of which FGV said it is the world’s largest producer.

Two weeks ago, Petaling Jaya Utara Member of Parliament Tony Pua raised concerns that Felda settlers lost an estimated RM177 million due to the drastic drop in FGV’s share price.

The CPO price has been trending lower since mid-2012. For FGV, the low price environment was exacerbated by low fresh fruit bunch yield and oil extraction rates due to the high percentage (43%) of old trees and operational inefficiencies.   

CIMB Research plantations analyst Ivy Ng said, historically, FGV’s performance has been weak compared with its peers, hence the group should continue to increase efficiency to improve its earnings prospects.   

“The CPO price is beyond the company’s control. At the end of the day, as a commodities player, it has to strive to be among the most efficient at the estate level to be competitive in this industry,” Ng said.  

CPO futures have fallen 18.85% over the last year, to last Friday’s close of RM2,148 per tonne.

The slump in CPO prices last year was brought about by higher-than-expected production of soyoil, which led to narrower price margins between CPO and soyoil.

Demand for CPO has also fallen from major importers such as China and India.

On FGV’s operations, Ng noted that it would take time for it to improve its efficiency at the estate level and reduce cost of production.  

“This is not something new, and every company should be embarking on this continuously,” she said.  

On the drastic drop in FGV’s share price, she said it was affected by various factors, including the weaker net profit and that several major shareholders have been disposing of their shares.

For its financial year ended December 2014, FGV’s net profit plunged 68.81% to RM306.37 million from RM982.25 million the year before. This is despite revenue strengthening by 30.76% to RM16.434 billion from RM12.568 billion.

CIMB Research has a “reduce” call on FGV, with a target price of RM2.30.

Ng was also negative on FGV’s acquisition of Asian Plantations Ltd (APL) last year, saying in a report last August that the acquisition was expensive for a loss-making entity.

According to Bloomberg, APL posted a net loss of around RM101 million for the 10 months to Oct 31, 2014. The acquisition was completed in October.

Other analysts have expressed concern about FGV’s M&A activities, with some saying the group should acquire companies with positive earnings to improve its own prospects.

“FGV should be more focused when committing to M&A,” an analyst told The Edge Financial Daily, as she noted the group is too “ambitious” in expanding its footprint in all the business segments it is involved in.

She said the agri-business giant should focus on developing its upstream plantation business by acquiring brownfield oil palm plantations as these will contribute immediately to the group.  

“The group should spend the remaining IPO proceeds prudently,” she said.

According to FGV’s latest financial statement, it has utilised RM4.012 billion of the proceeds from the IPO, leaving RM446.33 million as at Dec 31, 2014.

Of the balance, it said RM183.116 million would be allocated for the acquisition of plantation assets, RM242.544 million for the construction or acquisition of mills and refineries, with the remaining RM20.67 million set aside for working capital requirements and general corporate purposes.

Another analyst noted FGV has been actively replanting to improve the age profile of its trees. It plans to replant some 15,000ha a year within the next three years.  

However, he said it would take time to see the results.

“So you have to hold the stock for at least another three years,” he said. “Thus, the most immediate way to boost its earnings was to acquire other companies,” he said.

Another analyst with a local bank said FGV’s main challenge now should be to restore investor confidence by raising profitability in its core segments.

“I think operationally there are still a number of things they can do, like management has mentioned how it will keep trying to bring down production costs,” he said. “FGV’s downstream refining and crushing segments are probably looking at reaching the necessary volumes, as those businesses have proved that they can be profitable for other players.”

At press time, attempts to get comments from FGV proved unsuccessful.

The stock closed unchanged at RM2.10 last Friday, giving it a market capitalisation of RM7.624 billion.

The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Financial Daily, on April 20, 2015.