THIS year marks the first time that the Felda Land Development Authority (Felda), a statutory body founded in 1956 to alleviate poverty among rural Malays via a land resettlement scheme, will list one of its businesses.
Felda is floating its sugar business after completing the RM1.5bil acquisition in January 2010 of Kuok Brothers-controlled PPB Group Bhd's sugar assets, namely Malayan Sugar Manufacturing Co Bhd (now known as MSM Malaysia Holdings Bhd), a sugarcane farm in Perlis, a 50% stake in Kilang Gula Felda Perlis Sdn Bhd (KGFP) and a 20% share in Tradewinds (M) Bhd.
Currently, Felda, which owns one of the world's largest diversified agriculture groups, is targeting to list MSM, in which it has an 85% stake, around July. The remainder stake is owned by Koperasi Permodalan Felda Malaysia Bhd.
The initial public offering, to be managed by CIMB Investment Bank Bhd, values the company at RM2.46bil or RM3.50 a share. MSM houses the sugar plantation and refining operations of Felda.
Considered long overdue, attempts have been made before to list Felda Holdings Bhd, the commercial entity of the entire Felda group in which Felda, through Felda Global Ventures Holdings Sdn Bhd, holds a 49% stake.
In fact, there were also attempts to list Felda Global Ventures itself, a wholly owned unit of Felda.
However, these attempts came to nought as landowner issues, socio-political obligations as well as the settlers' unrest over allegations of dubious operations by Felda's top management almost brought the group to the brink of bankruptcy.
MSM is being listed at a time when global commodity prices, as measured by the Standard & Poor's GSCI Index, are volatile.
Since the beginning of this month, the GSCI Index, which is a composite index of 24 raw materials, have fallen by more than 10%.
Raw sugar futures have been hit hardest this year among these 24 commodities and while this will benefit MSM, this will not last forever.
Margins are higher when raw sugar prices are lower but when these prices are higher, then margins take a hit.
In fact, there are those who believe that with prices of raw materials lower, emerging economies such as China and India may take the opportunity to restock, thus cushioning prices.
This is what observers expect India, the biggest consumer and China, the next largest, to do in coming months.
For local refiners including MSM, this may not be a good thing since 99% of all raw sugar needs is imported.
Furthermore, raw sugar prices are influenced by adverse weather conditions and changes in international trade policies.
“It's dangerous to presume that the market is now on a downward trajectory because of the surplus,” Bloomberg, quoting ED & F Man commodities research head Farideh Bromfield, reported at a Singapore conference last week.
She says there is renewed interest from a number of importers.
On the other hand, Standard Chartered Bank analyst Abah Ofon told Bloomberg in an interview on May 10 that sugar futures will average 24 cents per pound in 2011, about 15% lower than the average so far this year.
This is because supply has outstripped demand after output grew for a second year with the surplus expected to quadruple to 10.57 million tonnes in 2011/2012.
Kingsman SA managing director Jonathan Kingsman says at a recent Singapore conference that Thailand, China and the European Union have seen production advances.
Bangkok-based Capital Nomura Securities pcl senior analyst Ploenjai Jirajarus says in a March 23 report that Thailand's sugar export volume this past January was 339,218 tonnes, up 18.9% from a year ago while the export price in the period rose 11.6% to US$521 per tonne.
“The year-on-year growth in export volume was a result of rising output of new sugar crop start harvesting from December 2010,” she says.
Jirajarus adds that although sugar futures were still up year-on-year, and that India's three million tonnes of surplus has enabled the country to export more sugar, which has caused the futures to see month-on-month drops.
So MSM, which operates the only sugar plantation and sugar cane mill (via KGFP), according to the company's draft prospectus, will have to reassure investors that its margins will not be affected by the volatility.
KGFP cultivates through its plantation in Chuping, Perlis sugar cane on 4,454ha plantation that the company owns as well as on 1,244ha of adjacent leased land.
About half of MSM's raw sugar supply is purchased via long term contracts while the remainder stock is purchased from the international market at prevailing market prices.
To do this, the company in its draft prospectus has cited the intention to pursue strategic acquisitions and investments in South-East Asia.
Given its financial strength and strong balance sheet, this will not be difficult but it may have to contend with Wilmar International Ltd, another Kuok Brothers-controlled entity which purchased Sucrogen Ltd, a unit of Sydney-based CSR Ltd, the world's fifth largest sugar refiner for US$1.5bil.
Tan Sri Robert Kuok, Malaysia's former “sugar king”, is said to have exited the Malaysian business in order to expand in the region using Wilmar as the vehicle.
For now, MSM will have to bide its time. The local sugar industry exports what is not consumed to Singapore, Indonesia, Australia, New Zealand and Philippines.
Malaysia also exports to other countries such as Pakistan, Thailand, Hong Kong, Sri Lanka, Cambodia and Russia.
Malaysia's exports of refined sugar have declined at a compounded average growth rate (CAGR) of 4.15% over the years from 2000 to 2009.
Consumption and subsidy
In an overview of the sugar industry, Frost & Sullivan Malaysia Sdn Bhd says last year the total production of refined sugar in Malaysia was recorded at 1.66 million tonnes, of which MSM and KGFP held 56.79% share of the market.
The other player of note in the industry is Tradewinds.
The total production is only 1% of the needs of the industry. The market research firm says imports of raw sugar mainly come from Brazil, Australia, Guatemala and Thailand.
Frost & Sullivan says consumption of refined sugar in Malaysia, MSM's main market, has been on the uptrend over the years 1991 to 2010 with a CAGR of 4.08% over the period.
“In 2009, the global average for sugar consumption per capita was 31 kg per person per year. Malaysia's sugar consumption per capita that year was 48 kg per person, well above the global average, and ranking Malaysia 22nd out of the 147 countries recorded by the US Department of Agriculture,” it says.
“Consumption figures have continued to grow during the Asian financial crisis in 1998, along with the global financial crisis in 2008/2009,” Frost & Sullivan says, adding that due to sugar being a staple food, consumption has not been adversely impacted during periods of economic crisis.
Over a 20-year period from 1991 to 2010, global consumption of refined sugar has seen steady growth, registering a CAGR of 1.80%.
Consumption is driven mainly by countries in Central and South America, Africa, the Middle East and Asia, with growth trends influenced by several factors such as increased consumer income, population growth, and rising demand for processed foods and drinks containing sugar.
Global consumption grew at the highest rate in 2007 by 6.04% from 141.82 million tonnes in 2006 to 150.39 million tonnes, attributed to a decline in the market price of raw sugar brought about by a surplus in global production.
Price controls is one area in which some quarters fear that MSM will turn out to be an illiquid stock given the restricted nature of the sugar business in the country.
MSM's performance, according to industry analysts, will depend largely on the Government's regulated policies such as the level of price ceilings and subsidies for sugar. For example, Frost & Sullivan says domestic consumption is closely tied with the domestic production level of refined sugar, as the Government restricts the importation of refined sugar.
However, the outlook seems promising, since under the 10th Malaysia Plan (10MP), the Government has decided to gradually rationalise subsidies and price controls for sugar.
In line with the 10MP, Frost & Sullivan points out that the Government had raised the ceiling price for refined sugar in 2010.
The retail price of coarse refined white sugar was controlled at RM1.45 per kg from Sept 13 2006 until Dec 31 2009, and on Jan 1, 2010 the price was increased to RM1.65 per kg.
This was subsequently followed by two more price increases in 2010, whereby the retail price of coarse sugar rose to RM1.90 in July and RM2.10 in December.
Then on May 10, the price of retail price of sugar went up by another 20 sen to RM2.30 per kg.
“The steady retail price of sugar has led to an increase in domestic consumption, most notably from 1998 to 2009 where consumption grew by 40.23% while retail prices remained steady between RM1.40 to RM1.45 per kg,” Frost & Sullivan says.
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