Friday 29 Mar 2024
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The continuing slump in crude palm oil (CPO) prices has made a dent in Felda Global Ventures Holdings Bhd’s (FGV) profits over the past year. While the group is now trying to tie up a major deal — the acquisition of a 37% stake in PT Eagle High Plantations Tbk — its purchases over the past two years have so far failed to contribute significantly to its bottom line.

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FGV (fundamental: 1.15; valuation: 2) has spent close to RM5 billion since 2013 in an effort to increase its landbank in order to rectify its ageing tree profile. These include the acquisition of Pontian United Plantations Bhd for RM1.2 billion, Asian Plantations Ltd (RM568 million), a 51% stake in Felda Holdings Bhd (RM2.2 billion), and four companies and estates belonging to Golden Land Bhd (RM665 million).

Despite its endeavours to secure new parcels to boost its crop production as well as replenish its crops via a replanting exercise, FGV’s overall output has remained depressed over the past two years. For example, in July this year, the group reported 406,297 tonnes of fresh fruit bunches (FFB) produced. In comparison, back in July 2013, before it began acquiring new assets, FGV produced 429,174 tonnes of FFB.

Acquiring the strategic stake in Eagle High is essential to FGV’s business aspirations. The deal would enable it to make significant inroads into the vast Indonesian palm oil market while giving it some 400,000ha of greenfield landbank to work with. Over the next few years, the group is hoping to lower the overall age profile of its palm trees to 8½ years old from 15 years old presently.

However, the weakening ringgit is proving to be a major inconvenience for FGV in its latest acquisition. The currency exchange rate stood at around RM3.77 against the greenback when the Eagle High deal was proposed in early June. Since then, it has depreciated to RM4.22 as at Aug 26, or a 12% decline.

This means that FGV’s purchase price has ballooned significantly as it is paying for the company using its ringgit-denominated cash reserves. The entire deal is valued at US$745 million, or RM3.14 billion based on the current exchange rate. By way of comparison, the deal was priced at RM2.81 billion in June.

Of the US$745 million figure, some US$698 million is to be satisfied in cash. This amounts to RM2.94 billion, or an extra RM314 million from the RM2.63 billion previously due to the ringgit’s depreciation.

“Investors perceived the price as expensive back in June. Now with the ringgit and CPO prices getting weaker, it has become an even pricier purchase. The deal has basically become more unpalatable and FGV will have to explain this issue to its shareholders, including the rural Felda settlers,” says an investment banker.

In fact, the sizeable sum may have been the reason why FGV could not transfer a US$174.5 million refundable deposit to Eagle High earlier, resulting in the higher acquisition cost for the group due to the ringgit’s sharp decline over the past month.

FGV CEO Datuk Mohd Emir Mavani Abdullah told digitaledge Daily on Aug 26 that the group is still awaiting clearance from Bank Negara Malaysia and the Ministry of Finance before the funds can be transferred.

An analyst from a research house believes the deal should be repriced to reflect recent valuations. “The Indonesian firm offers good growth opportunities but [the purchase] has to be done at the right price. Eagle High’s entire market cap of US$540 million is less than the US$745 million that FGV is paying for a 37% stake. If it goes ahead and pays the amount, there may be a substantial write-down in the value of the asset in the future.”

Assuming that a significant portion of consideration for the Eagle High transaction is taken from its existing cash pile of RM2.2 billion, FGV will need further capital in order to continue its capex drive for replanting its landbank.

Due to the worsening fundamentals of palm oil as well as the ongoing turmoil in the equities market, FGV is facing an uncertain few months ahead. It has to ramp up its monetisation exercise in order to balance its books, especially if it intends to wrap up the Eagle High acquisition by the end of the year. 

On Aug 27, the group announced the proposed disposal of its Canadian downstream assets to Viterra Inc for C$109 million (RM608 million). The sale of the subsidiary will boost FGV’s cash pile as well as its downstream operations, which had been dragged down by the subsidiary’s losses. 

The various concerns of FGV’s shareholders will also need to be addressed by the group. Some say FGV’s falling profits and depleting cash pile will impede its ability to pay dividends. For the first six months of this year (1H2015), the group reported net profits of RM49.66 million, compared with RM295.49 million as at 1H2014.

Historically, the group has given away more than 60% of its annual net profit as dividends. Though it had previously told stakeholders such as rural settlers that they can expect to receive a payout each year, the quantum of dividends may be significantly lower now due to the weaker earnings — unless it decides to tap into its cash reserves.

Furthermore, its stock price and fundamental valuations remain under pressure. In an Aug 25 note, CIMB Research cautioned that FGV’s net tangible assets per share of RM1.33 could dip further due to the potential dilution arising from the Eagle High deal, which could affect its cash reserves and operational cash flow.

However, at present, its share price of RM1.20 is already below the NTA value and could be an attractive value proposition for investors, says the firm.

 

This article first appeared in digitaledge Weekly, on August 31 - September 6, 2015.

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