Felda Global Ventures Holdings Bhd (FGV) is believed to be in the midst of finding a solution to improve the terms of its land lease agreement (LLA) with the Federal Land Development Authority (Felda) which has distorted the calculation of its profits, say sources.
Under the LLA agreement signed in 2012, FGV has to pay Felda a fixed amount of RM250mil per year in cash for 20 years and a 15% share of operating profit from the sales of fresh fruit bunches derived from the estate land leased from Felda.
From a business perspective, sources says the LLA business model is working well at the FGV group’s operational level.
However, the LLA factor in practice is distorting and complicates the fair value accounting treatment on FGV, which saw its profits pulled down in its recent financial year results.
“Hence, FGV is trying to work out with Felda on how to make it easier for the LLA fair value change calculation to be done and better reflect on the operational profits based on measures taken by the FGV group since 2012,” adds the source.
FGV is the only plantation company in Malaysia that adopts the unique LLA business model that has paved the way for its listing exercise back in June 28, 2012.
Felda, by virtue of the Land Settlement Act 1960, was given over 850,000ha by the state goverments back in the 1950s. Of the total, some 479,765ha went to the smallholders and the remaining 355,000ha of oil palm estates, which was originally owned by Felda, was managed by its former subsidiary Felda Holdings Bhd (FHB).
But in January 2012, the 355,000ha was injected into FGV as part of its initial public offering (IPO) exercise and the mechanism was via a 99-year lease under the LLA.
FGV group chief financial officer Ahmad Tifli Mohd Talha, meanwhile, maintains that FGV results for financial year ended Dec 31, 2014 was better than 2013.
Year-on-year, FGV recorded a 30.8% jump in revenue to RM16.4bil while operating profit rose 10% to RM1.03bil due to the effect of 100% consolidation of Felda Holdings Bhd into FGV.
The average CPO price secured was higher at RM2,410 per tonne compared with RM2,333 per tonne in 2013.
Even the group’s oil extraction rate (OER) is up at 21.01% in 2014 versus 20.44% a year earlier. Tilfi adds that the less than one percentage point increase in OER plus increase in the kernel rate actually contributed RM220mil in revenue to FGV last year.
However, year-on-year, the group’s net profit was down on the fair value losses in LLA of RM173mil from a gain of RM494.5mil in 2013.
Other factors include additional depreciation of assets due to acquisitions of FHB, Pontian United Plantations Bhd and FGV Cambridge Nanosystems amounting to RM86mil as well as the lower crushing margin of its canola crushing plant in Canada.
Fair value change
“The fair value liability changes have made our profits look worse,” says Tifli but FGV cannot run away from it because this is a fair value accounting treatment under the International Financial Reporting Standard (IFRS) adopted by the Malaysian Accounting Standard Board.
As defined by the IFRS, FGV will have to treat its “costs” i.e. the LLA fixed lease amount payment and the share of profit to Felda – to the fair value accounting based on the present value of FGV’s future cashflow.
“So the fair value calculation means that instead of the costs and cash that we have to acquire, we have to do the assumptions for future CPO price, costs and volume.
“Being a plantation company, we have to take into account the replanting and tree age profile aspect as well,” he adds.
In terms of the fixed amount to be paid to Felda, it is very clear cut.
“However, it gets complicated when we need to assess the future 15% share of the operating profit to be paid based on the future value of the CPO price, costs of production and CPO volume.”
In fact, FGV needs to review the assumptions every six months given the direction of the commodity price, costs and production.
“Hence when we made the revision on the assumption it will automatically change the fair value calculation,” says Tifli, adding that this revision will “swing” either to put the fair value changes into LLA liabilities or otherwise.
Since 2012, the group has put in measures such as cost-efficiency and best practices – which have started to show results.
For example, FGV’s CPO cost of production (COP) ex-mill has come down to RM1,397 per tonne in 2014 from RM1, 457 per tonne in 2003.
“We are happy to achieve our target to bring down the cost of production (COP) to below RM1,400 per tonne last year and will continue to do so in 2015,” says Tifli. The CPO cost of production is the benchmark among oil palm planters to measure their profits.
To date, the industry COP is in the range of RM1,450 to RM1,500 per tonne. Top efficient planters in Peninsular Malaysia include Sime Darby which has a COP of RM1,250 per tonne while IOI Corp about RM1,200 per tonne.
“I admit that FGV COP is still high compared to other efficient planters because of our high palm tree age profile,” says Tifli.
The group’s tree age profile of 20 years and above now represents about 46% of the total planted area compared with 57% when FGV was listed in 2012 – thanks to the active replanting of 15,000ha annually.
Focus in 2015
Given the extremely challenging external outlook in palm, sugar and rubber business this year, Tifli points out that FGV would focus internally by way of reducing its cost of production of CPO per tonne, strengthening asset-backed trading and improving capital efficiency.
For asset-backed trading, he says that FGV Trading, a new company set up recently, would manage the marketing of CPO and its other refined products in order to generate the best margins.
“This is a non-speculative trading and a risk mitigated business.
“FGV Trading even has the right to buy CPO from outside (non-FGV estates) for volume growth as compared to sell our own CPO about 3 million tonnes per year in the past,” adds Tifli.
On improving the group’s capital efficiency, FGV still has about RM466mil left out of the RM4.5bil proceeds raised from its IPO exercise in 2012.
“We will utilise all the remaining proceeds for FGV growth and expansion plans this year,” says Tifli. He explains that the mergers and acquisitions this year will focus on generating immediate profits for FGV, for example, purchasing brownfield oil palm plantations.
FGV, which considers newly acquired Asian Plantations Ltd last year as a mid-term investment, expects the plantation could only start to generate the returns by 2017, adds Tifli.
He points out that FGV is also reviewing its business portfolio whereby some of its non-core and non-profitable businesses will likely be divested.
So far, FGV has identified its travel and information technology businesses up for disposal. “There will be more (disposals) to come this year,” adds Tilfi.
Of late, analysts are speculating that FGV will likely dispose of its non-profitable Canada-based canola and soybean crushing plant, which was badly hit by lower crushing margins in North America.
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