This article first appeared in The Edge Malaysia Weekly on February 10, 2020 - February 16, 2020

AMONG the reasons TH Plantations Bhd incurred losses to the tune of hundreds of millions of ringgit were the acquisitions of Bumi Suria Ventures Sdn Bhd (BSV) and Maju Warisan Mas Sdn Bhd (MWM) in October 2012.

For the financial year ended Dec 31, 2018 (FY2018), the plantation company, majority owned by Lembaga Tabung Haji (TH), recorded a loss before tax of RM678.11 million, due to RM446.83 million in impairments, write-offs and write-downs the group had to undertake on its plantation assets. It did not give further details.

For the nine months ended Sept 30, 2019, THP impaired RM53.6 million on its property, plant and equipment.

But what happened prior to and during the acquisitions of the two companies? How did THP’s top management back then get it so wrong when they were presented with the proposals to acquire the two companies?

According to reports THP has lodged with the Malaysian Anti-Corruption Commission (MACC) and the Securities Commission Malaysia on the transactions, which were sighted by The Edge, there was a substantial difference between the declared total plantable area of the plantations and the actual areas surveyed by THP.

The total plantable land area declared by the vendors of the two companies was 6,100ha. However, when THP found that fresh fruit bunch (FFB) production was significantly and consistently lower than projected, it conducted an aerial survey of the land in November 2018. The survey found that the total plantable area was only 4,842ha.

“The much lower actual plantable area was the reason for the low FFB production. At the same time, the board of THP was presented with a high FFB production volume figure,” says a source familiar with the matter.

To recap, on Oct 25, 2012, THP announced that it had entered into a conditional share sale agreement the vendors of BSV and MWM for the acquisition of the entire equity interest in the companies.

One of the vendors was a formerly public-listed company with substantial operations in Sabah and Sarawak. The purchase consideration for BSV was RM212.5 million while that of MWM was RM42.08 million. THP also stated in the announcement that the group expected to incur about RM30 million over a period of four years to cultivate the oil palms to maturity.

As TH embarked on a restructuring of its investee companies in late 2018 to regularise its operations, its audit committee proposed a forensic audit of the transactions. TH owns a 73.84% stake in THP.

TH has yet to reveal the outcome of the forensic audit. Notwithstanding, THP is in the process of disposing of BSV and MWM to Tamaco Plantations Sdn Bhd for RM170 million.

The disposal plan has attracted scrutiny and criticism, especially from members of the opposition political parties. On Jan 24, Umno Youth leader Dr Asyraf Wajdi Dusuki questioned the disposal deal, saying that it is being done at a loss to THP and its ultimate shareholders — Tabung Haji depositors.

Former prime minister Datuk Seri Najib Razak had also questioned the change of the valuers to appraise the land. In a Facebook post questioning the deal, Najib claimed that the new valuer, which he did not name in the post, had employed a high discount rate of 14% when valuing the land.

Meanwhile, the source says that the misrepresentation in the actual total plantable area had led to  higher projections by THP for FFB production, which were not met between 2014 and 2018.

According to data from THP, the FFB production volume from the BSV and MWM plantations was at most 40% of the projections. For example, in 2014, the plantations produced 27,605 tonnes of FFB, which was 40.6% of the projected 67,990 tonnes for October 2012.

In August 2012, CH William Talhar & Wong (WTW) valued the land at RM360 million, based on the representations of the vendors, which were verified by THP at the time. However, an independent valuation by Khong & Jaafar of the same land in January last year valued the plantations at RM183.9 million, which was RM176 million or 48.9% less than the original valuation. It is not clear whether WTW and Khong & Jaafar went to the ground to assess the land.

It is also unclear whether THP had made an impairment on the difference in valuation in its books.

It is understood that THP had also sent its officers to Sibu and Bintulu to assess the land in April 2012, the source says, although it is not clear how the survey was done. The officers came up with a preliminary feasibility report on BSV a month later.

Using information from the report, THP’s then CEO, Datuk Seri Zainal Azwar Zainal Aminuddin, tabled the proposal for the acquisition to the group’s board of directors a source says. According to the report sighted by The Edge, THP’s investment committee ordered another independent valuation of the land but no second independent valuation was commissioned by THP.

Asked to comment by The Edge current CEO Muzmi Mohamed declined.

The report also mentioned that THP had signed a quarry supply agreement (QSA) and supplemental agreement under terms that did not necessarily benefit the group.

In the QSA, BSV, which owns a quarry in Sibu, granted the exclusive rights to extract, remove and sell the quarry products back to BSV and other parties for 20 years to a subsidiary of one of the vendors. BSV undertook to purchase 200,000 tonnes of quarry products from the company annually for 10 years, starting six months after the expiry of the unconditional date of the agreement.

According to the report to the MACC, the quarry products were to be purchased by THP at RM25 per tonne, based on the QSA. At the same time, the vendor’s subsidiary was required to pay RM1.5 million per year in rent to BSV for the quarry during the tenure of the agreement. Under the QSA, royalty payments to the Sarawak government were to be borne by the contractor.

This was deferred via a letter dated April 1, 2015, whereby the price of the quarry products to be purchased by BSV was reduced to RM17.50 per tonne while the company waived the yearly rental. Royalties to the state government were also to be borne by BSV.

These changes were included in a supplemental agreement on July 4, 2016, according to the report. In addition, when the supplemental agreement was signed, RM13 per tonne was set as the rate for quarry residue.

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