FGV in transition after termination of land lease agreement with Felda

FGV in transition after termination of land lease agreement with Felda
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KUALA LUMPUR (Oct 28): FGV Holdings Bhd’s plantations will shrink substantially by up to 70% or 355,000 ha after the termination of the land lease agreement (LLA) by its controlling shareholder Federal Land Development Authority (Felda).

Datuk Sri Mustapa Mohamed, Minister in Prime Minister Department (Economy), announced that the Cabinet has agreed to the recommendation for the termination of Felda’s LLA with FGV.

However, the statement did not mention the compensation that Felda will need to pay to FGV as a result of the termination of the LLA. Analysts estimate the compensation could be to the tune of RM3 billion to RM4 billion. 

FGV currently manages 493,725ha of plantation land in Malaysia and Indonesia, and produces about three million tonnes of crude palm oil annually. Of these plantations, more than 355,000 ha is controlled via the LLA with Felda, which owns a 33.66% stake in the plantation group. 

In the statement issued this afternoon, Mustapa said a report prepared by a special task force led by Tan Sri Abdul Wahid Omar was tabled at a Cabinet meeting on Oct 14. At the meeting, the Cabinet agreed to the task force's recommendations, comprising the restructuring of Felda’s debts, increasing the core income from Felda plantation lands by terminating the LLA and increasing the independence of settlers, according to the statement.

The special task force has identified several main issues that need to be addressed expediently, which includes Felda’s unsustainable capital structure and high level of debt, which amounted to RM10.6 billion, said Mustapa.

The termination of the LLA did not come as a big surprise as it has been the talk in the industry for a while. 

It is understood that in the event the LLA is terminated, FGV’s compensation would be calculated based on the average profit per mature hectare for the entire leased land (based on its latest audited financial statements at the point of notice) multiplied by the loss of FGV’s future profits.

FGV will be compensated for 10 years in future profits if the LLA is terminated less than eight years from the last replanting, and five years of future profits if the agreement is terminated more than eight years from the land’s last replanting.

Felda is also obligated to take over the employment of relevant plantation staff with the same employment terms or better than what was offered previously if the LLA is terminated.

In an interview in August, FGV CEO Datuk Haris Fadzilah Hassan told The Edge if Felda decides to terminate its LLA with FGV, it would be a huge financial undertaking. Haris noted that FGV has communicated to Felda that should there be any variation in the LLA, it would be subject to shareholders’ approval.

Haris then commented the plantation group will be able to forge ahead, even if its 99-year LLA is terminated. 

Coincidently, about two weeks ago, FGV received an expression of interest from Perspective Land (M) Sdn Bhd (PLSB), which is wholly owned by Tan Sri Syed Mokhtar Albukhary’s privately-held Restu Jernih Sdn Bhd,

According to FGV's filing with the stock exchange, PLSB intends to participate in FGV via an injection of plantation assets in exchange for shares. PLSB owns the Tradewinds group of companies, which include Tradewinds Plantation Bhd and Central Sugars Refinery Sdn Bhd, which are in the same businesses FGV is involved in.

The timing seems opportune for the tycoon, as crude palm oil prices have recovered from their trough in May. The commodity's three-month futures price has climbed from a low of RM1,962 in May to above RM2,800-level.

Read also:
FGV expects compensation from LLA termination to be between RM3.5b and RM4.3b 
PMO: Cabinet agrees to termination of Felda’s land lease agreement with FGV

Syed Mokhtar expresses interest to merge his plantation assets with FGV
Putting FGV back on track