This article first appeared in The Edge Malaysia Weekly on May 1, 2017 - May 7, 2017

A two-part plan that could see the Federal Land Development Authority (FELDA) buy back its plantation land from its listed unit Felda Global Ventures Holdings Bhd (FGV) has been mooted. This will eventually detach FELDA from FGV.

The second part of the plan involves new shareholders injecting assets into FGV in return for shares and take over the management, sources say.

FELDA chairman Tan Sri Shahrir Abdul Samad seems to be pushing this corporate exercise. His main grouse is said to be the manner in which FGV is run. He could not be contacted for comment.

FELDA holds 33.67% equity interest in FGV, of which a 21.25% is held directly and 12.42% through Felda Asset Holdings Co Sdn Bhd.

If the plan materialises, the new shareholders will be two Indonesian businessmen, Tan Sri Peter Sondakh and Martua Sitorus. They will end up collectively holding a stake of about 25% in FGV after the asset injections, according to sources.

Sondakh controls PT Eagle High Plantations Tbk, the plantation group in which FGV had wanted to acquire a 37% stake more than a year ago. Sitorus, also known as Thio Seeng Haap, is the co-founder of Wilmar International Ltd. According to Wilmar’s latest annual report, Sitorus owns 194.32 million shares, or just above 3% equity interest, in the plantation group.

However, Sitorus’ brother Ganda controls considerable plantation assets, such as PT Agro Mandiri Semesta (known as Gama Plantation) and PT Ganda Sawit Utama, among others.

“The plan has been proposed, but whether it will materialise is another thing … it’s very political as it involves FELDA, which in turn involves 54 constituencies,” a merchant banker familiar with the deal says.

FGV has about 450,000ha of plantation assets and is the world’s third-largest oil palm estate operator. It also has a sizeable amount of downstream assets.

In October 2013, FGV acquired the remaining 51% of Felda Holdings Bhd which it did not own for RM2.2 billion cash from Koperasi Permodalan Felda Malaysia Bhd (KPF). Felda Holding is the main land-owning company.

KPF is an investment co-operative made up of FELDA settlers and staff savings, and its main investment is a 5.5% stake in in Felda group’s equity shareholdings.

In February 2014, KPF bought 5% in FGV from Felda Asset Holdings for RM825.30 million. FGV’s market capitalisation at its close last Friday was RM7.77 billion, which means KPF is sitting on a paper loss of RM436.77 million.

A check with the Companies Commission of Malaysia reveals that Felda Holdings posted an after tax profit of RM179.26 million as at end-­December 2015, but its revenue was only RM196.25 million.

It is not known why the revenue and profits were that low, as the company’s financials between 2006 and 2012 were much stronger.

Between 2006 and 2012, Felda Holdings’ financials were at their lowest in 2006 when it chalked up RM415.67 million from RM8.15 billion in revenue, while its best performance was in 2011, when it recorded RM721.99 million in after tax profit from close to RM19 billion in revenue.

As at end-December 2015, Felda Holdings had non-current assets of RM1.08 billion, current assets totalling RM434.53 million and current liabilities of RM70.15 million, with no long-term debt commitments. Felda Holdings also had reserves of RM1.23 billion.

Also, crude palm oil prices in October 2013 averaged RM2,409 per tonne while, it presently trades at about RM2,500 per tonne.

Back-of-the-envelope calculations — considering that 51% of Felda Holdings was worth RM2.2 billion about four years ago — indicate the entire Felda Holdings would be valued at about RM4.3 billion.

Thus, FGV will be left with only its smaller assets acquired after the listing, such as Pontian United Plantations Bhd, Asian Plantations and Golden Land Bhd. It will also have the downstream business and its sugar business MSM Malaysia Holdings Bhd under its belt.

However, there is a land lease agreement (LLA) between FGV and FELDA, under which the former will pay the latter a fixed sum of RM250 million in cash annually for 20 years, and a 15% share of operating profit from the sale of fresh fruit bunches derived from the estate land leased from FELDA.

FGV’s FY2016 annual report stated that as at Dec 31, 2016, the LLA liability for FGV amounted to RM4.4 billion.

FGV states that “the fair value of the LLA liability is measured using cash flow projections based on financial budgets approved by the directors covering a 95-year period”.

“As a result of the fair value assessment, the group [FGV] has a recognised LLA liability of RM4.4 billion (2015: RM4.62 billion).”

It also states that in the event of termination, “FGV will pay FELDA compensation for the loss of expected future profits in respect of the land, based on the average profit per hectare and the age profile of the applicable biological assets given up”.

How this will be settled is not known. On the asset injection by the  Indonesians, the source adds, “It is likely to be a cashless deal.”

Sondakh controls a 65.5% stake in Eagle High via his flagship Rajawali Corp. Sondakh is supposedly close to Prime Minister Datuk Seri Najib Razak.

Interestingly, the elder Sitorus was the executive deputy chairman of Wilmar from July 2013 to March this year, when he opted for a non-executive position. Does his stepping down as the executive deputy chairman have to do with his play for FGV?

Initially, market talk was that it was Wilmar International which was eyeing FGV.

However, in an emailed response, a Wilmar spokesperson says, “Wilmar is not involved in any acquisition deals with Eagle High or FGV.”

It is not clear what is the status of another ongoing deal in which Felda Investment Corp Sdn Bhd was ­slated to buy a 37% stake in Eagle High from Sondakh’s Rajawali Group for US$505.4 million.

The US$505.4 million price tag is said to be based on Eagle High’s planted area of 125,000ha, instead of its total land bank of more than 400,000ha.

But Eagle High has not been performing financially. For its financial year ended Dec 31, 2016, the company suffered a net loss of US$29.31 million (RM127.23 million) from US$191.17 million in revenue.

FGV has come under fire for having spent billions of ringgit on its asset acquisition trail but is not performing as well as its peers. Worse still, replanting is required for a large part of its plantations.

For its financial year ended Dec 31, 2016, FGV recorded a paltry net profit of RM21.61 million from RM17.28 billion in revenue.

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