Fima’s yield attractive but litigation risk lingers

This article first appeared in The Edge Malaysia Weekly, on January 15, 2018 - January 21, 2018.
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INVESTORS drawn to Fima Corp Bhd’s attractive yield will have to bear with the risk of further litigation over its Indonesian estates, although this may have been priced into its share price.

Fima’s lacklustre share price performance has boosted prospective dividend yields for the stock. Over the last five financial years, its net dividend per share ranged from 12.5 sen to 35 sen — translating into a potential yield of between 5.95% and 16.7%, based on last Wednesday’s closing price of RM2.10.

However, the higher yield is due to the litigation risk in Indonesia as Fima fights to keep a substantial portion of its planted land bank. The company received a positive ruling from the Indonesian Court of Appeal last month, which allowed it to keep most of the affected land.

That means investors eyeing the stock will have to weigh the attractive yield against the worst-case scenario in respect of the litigation. The stock has fallen 12% since it hit its one-year high of RM2.21 last August, although it remains 10.92% higher over a 12-month period.

The share price weakness may indicate that investors have already priced in the company’s litigation risk, MIDF Research analyst Alan Lim tells The Edge.

Lim has a “buy” call on the stock with a target price of RM2.60, implying an upside potential of 23.81%.

The single largest shareholder in Fima at 61.08% is Fima Metal Box Holdings Sdn Bhd, a wholly-owned unit of listed conglomerate Kumpulan Fima Bhd. Kumpulan Fima is 52.17%-controlled by BHR Enterprise Sdn Bhd.

BHR Enterprise is the family vehicle of the late Tan Sri Bashir Ismail, who was, among others, the chairman of the Malaysian Palm Oil Board and Malaysia Airports Holdings Bhd.

The family control means Fima’s dividend payout will likely remain strong going forward. Fima traces its listed history back to 1976 as Metal Box Bhd. It acquired the government’s security printing division in 1990.


Potential write-back

To recap, in August 2016, Indonesia’s Ministry of Agricultural and Spatial Planning revoked the cultivation rights of Fima’s 80% subsidiary PT Nunukan Jaya Lestari (PTNJL). The rights were issued in 2003.

According to Fima’s filing with Bursa Malaysia, the ministry had said the rights were improperly issued, causing some overlap between Fima’s planted areas with forestry areas. The company said the issue was due to alleged “administrative irregularities” by certain officers of Badan Pertanahan Nasional Provinsi Kalimantan Timur during the issuance.

On June 13 last year, the State Administrative Court dismissed Fima’s application to annul the ministry’s revocation order.

On Jan 4, the company announced that the Pengadilan Tinggi Tata Usaha Negara Jakarta — which is equivalent to a Court of Appeal — partly allowed its appeal against the State Administrative Court’s decision and declared the revocation order to be void save for a 5,138ha tract that overlaps with forestry areas or third-party interests.

Fima said PTNJL is seeking advice on the next course of action. Since the dispute started, the local government in Kabupaten Nunukan has allowed Fima to continue its plantation operations pending final determination of the matter, it added.

According to its latest annual report, 6,379.8ha or 85% of Fima’s planted area is in Indonesia. The company said the planted area affected by the revocation order measures 3,691.9ha.

As at March 31 last year, Fima’s land bank stood at 23,414ha across nine estates, according to its website. Of this, 19,974.13ha were held under PTNJL and only 6,379.8ha were planted.

While the litigation risk has not fully dissipated, MIDF Research believes the Court of Appeal’s decision signals the possibility of a write-back down the road as Fima had previously recognised an impairment loss of RM44.7 million for the affected asset.


Income mix shifting

For the financial year ending March 31, 2018 (FY2018), MIDF Research expects Fima’s net income to decline more than a quarter year on year on flat revenue.

In FY2017, the company reported a 36.2% y-o-y drop in net profit to RM35 million on the back of a 0.8% decline in revenue to RM372.1 million due to impairment losses on property, plant and equipment as well as biological assets held under PTNJL.

For the six months ended Sept 30, 2017 (1HFY2018), it posted a net profit of RM21.93 million (-31.41% y-o-y) on revenue of RM147.9 million (-24.6% y-o-y).

It attributed the decline to lower revenue from its legacy manufacturing arm — which produces security and confidential documents — partly offset by a 71% increase in the plantation arm’s pre-tax profit contribution.

Looking ahead, Fima is expanding its plantation land bank further. Last October, it announced the proposed acquisition of Java Plantations Sdn Bhd, a unit of Java Bhd, for RM5.2 million cash. The deal is expected to add 1,331ha of leasehold land in Kelantan to Fima’s land bank.

The acquisition leverages Fima’s balance sheet, which was in a net cash position as at Sept 30, 2017. It has RM226.48 million in cash and no borrowings, according to Bloomberg data.

It is worth noting that the oil palm business contributed 47.53% to Fima’s revenue and 60% to its pre-tax profit in 1HFY2018, placing it on track to a milestone year, in which the segment overtakes its manufacturing arm as the primary earnings driver.

Over the last five financial years, the oil palm segment’s contribution to group revenue ranged from 25.7% to 33.8%, while the pre-tax profit proportion of oil palm operations had yet to breach the 40% threshold on a full-year basis.

There will be more clarity on the earnings mix prospects when Fima releases its 3QFY2018 results next month.

For the full year, MIDF Research’s Lim estimates the company’s revenue and net profit at RM343.7 million and RM56.9 million respectively, driven by the oil palm business. That indicates an attractive forward price-earnings ratio (PER) valuation of about nine times. In comparison, other mid-cap plantation stocks under his coverage trade between 13 and 19 times PER.


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