Fixing FGV


  • Business
  • Saturday, 17 Jun 2017

Trust not discussed: A truck carrying oil palm fruits passing through Felda Sahabat plantation in Lahad Datu. FGV said in an announcement to Bursa Malaysia that there was no discussion on the creation of a plantation trust at the FGV and Felda boards. – Reuters

FIGURING out what to do with the plantation business under Felda Global Ventures Bhd (FGV) has been a lingering headache for the Federal Land Development Authority (Felda).

In the last three years, Felda has seen the income it receives from FGV whittled down. It has come to a point where it feels something needs to be done to ensure that Felda, by its own estimation, can receive the up to RM3bil a year needed to run the government agency and its programmes for settlers as smoothly as possible.

Felda chairman Tan Sri Shahrir Samad has made it clear that he would like to see the plantation group better managed because it is the cash cow that the federal government entity depends on to help the settlers.

“At the end of the day, the main issue is still on how FGV will be able to deliver a sustainable income to Felda,” Shahrir tells StarBizWeek.

In a nutshell, a sustainable income is crucial for Felda because it acts like a bank for all its settlers.

“Do you know that settlers will get back 100% from the sale of their fresh fruit bunches and Felda will need to source for additional funds to provide these settlers with advanced money while they wait for their trees to mature in the case of new plantings or replanting exercise,” explains Shahrir.

Compounding matters is the fact that FGV is a political hot potato because the settlers are predominantly strong supporters of the ruling party. The fact that problems within FGV draws the immediate attention of Putrajaya underscores this fact.

Putting the politics aside, Felda has been looking into ways to improve the returns from its assets since January this year when Shahrir took over the helm.

In the past one month, there have been several corporate proposals being tossed about by bankers – ranging from privatising FGV to getting a strategic shareholder to come in and take part of Felda’s 33% stake in the listed entity. Towards this end, one name that has cropped up is Martus Sitorus, the Indonesian co-founder of Wilmar International Ltd.

However, so far no plan has been viable because of the sensitivities involving FGV.

Things at FGV came to a boil two weeks ago when the board led by Tan Sri Mohd Isa Samad suspended four top officials including group president and chief executive officer Datuk Zakaria Arshad pending an investigation related to a subsidiary of FGV.

Amidst this scenario, a proposal came about for the creation of a business trust for FGV’s plantation. This was something that was discussed at the very high level at Felda and Putrajaya.

Shahrir says he had heard of such plans but deftly brushed aside from commenting on it.

“I have heard it only for the second time,” he says.

In an announcement to Bursa Malaysia late Thursday, FGV stated that there was no discussion on the creation of a plantation trust at the FGV and Felda boards.

Sources say the plan in a nutshell is for Felda and the government to consider injecting the plantation business into a business trust with Felda as the plantation trust manager.

What that does to the land lease agreement (LLA) between Felda and FGV will need to be ironed out. As for FGV shareholders, especially minority shareholders, what would the carving out of the plantation business mean for the company and shareholder value should the latest plan by Felda get the rubber stamp from authorities?

Value creation

Should the plantations of smallholders be carved out of FGV, analysts feel there needs to be a lot of clarity as to what are the terms for that structure to materialise.

The alternative is for Felda to cancel the LLA and FGV receives a compensation said to be in the tune of RM3.2bil. With that money, FGV could start looking at acquiring new plantations to add to the 70,000ha that it has bought since acquiring various plantations since its listing in July 2012.

However the flipside is the possibility of FGV once again going on a spending spree. To be noted is that it was sitting on a cashpile of RM6bil after the listing in 2012. The cash has come down significantly following several acquisitions. And so has its profitability.

On the converse, if Felda were to privatise FGV, it would have to pay about RM1.5bil more and in return would gain full ownership of the plantation company.

“So why pay RM3.2bil just to cancel the LLA,” says a banker.

Considering the intricacies and taking cognisance that Felda is mindful of bloating its balance sheet, the plantation trust proposal came about.

If FGV shareholders retain ownership of those plantations in the business trust, the lower tax structure of the trust should theoretically improve the financial performance of the estates if the operations of FGV are run more efficiently.

Under the terms of the LLA, which covers 335,000 ha of plantation land, FGV is to pay Felda a fixed amount of about RM250mil per year in cash for 20 years and the second component is a 15% share of operating profit from the sales of FFB derived from the estate land leased from Felda.

The report carried by StarBiz yesterday stated that the proposed plan was to distribute the units in the trust, which will be a plantation trust, to all shareholders of FGV and Felda will be appointed as manager of the plantation trust.

Through that exercise, Felda will regain control of the 335,000 ha of plantation land.

Felda’s beef is that its income from FGV has been dropping and it feels a more transparent structure and efficient management of those estates will bring about the desired results it seeks.

In that plan, the Felda land will revert back to its control where it will manage the land. The report says issues pertaining to the LLA and the minorities of FGV not having the large plantation exposure would be eliminated.

After carving out the plantations, FGV would still be left with the 70,000 ha that it acquired from the proceeds of its listing in 2012 and all the downstream business of Felda including the mills, logistics arm and a 51% stake in MSM Holdings Bhd, which is a dominant sugar refinery company.

Residual value

In terms of valuation though, the smallholders’ land that is valued under FGV is higher than what FGV will receive from the cancellation of the LLA.

As with most plantation companies, FGV’s market capitalisation of RM6.4bil is lower than the value of the assets of a company. FGV in its latest financial results says it has assets of RM21bil but an analyst has valued the smallholders’ land at RM5.4bil leaving FGV with plantation land valued at nearly RM1.5bil.

FGV is expected to retain the downstream businesses such as the oil palm mills and also its 51% stake in MSM Malaysia Holdings Bhd. The downstream businesses, based on an analyst report, is valued closed to RM4bil while FGV’s stake in MSM is worth RM1.45bil.

Analysts said the performance of the 72 oil palm mills under FGV is average among plantation companies in Malaysia while there is scant details about the value of FGV’s logistics operations.

There are aspersions on whether a break-up of FGV would create value for the company.

“FGV will receive money if the LLA is cancelled but they have to go and acquire new plantations,” says an analyst covering the sector.

One analyst says the going rate for greenfield plantation land is RM30,000 per ha and for brownfield land, it is between RM70,000 and RM80,000 per ha.

“The cost of plantation land will depend on the age of the trees and also location of the plantation land,” he says.

Another issue that have some analysts concerned is whether there is a drop in the revenue for FGV should those estates be taken away. An analyst feels that the decline in revenue might not offset the removal of the LLA payment, in effect causing more of a financial strain on FGV.

Creating a business trust

One other issue for FGV is the unproductive nature of its plantation operations. Analysts says FGV’s final performance puts it at the bottom percentile of listed companies on Bursa Malaysia and that kitchen sinking activities undertaken by the company has not derived the results the market was expecting.

The concept of a business trust is not new in Malaysia. Regulation for such a business entity was drafted in 2012 but no company has followed through in listing cashflow accretive assets in a business trust on Bursa Malaysia.

Both Digi.com Bhd and Berjaya Sports Toto Bhd explored the possibility of carving out assets to be parked under a business trust but walked away from seeing through with that action.

The closest Bursa Malaysia has come to plantation assets parked under a different structure is when the Boustead group had plantations listed in the Al-Hadharah Boustead REIT. Listed in 2007, the REIT was taken private by Boustead Holdings Bhd.

Al-Hadharah was the country’s first Islamic plantation-based REIT and had largely invested in plantation estates and mills.

REITs and business trusts are unique entities that are different than a normal company. The conditions and limits under each are different but REITs have generally found more favour among investors that are drawn towards the higher dividend payout requirement and also limitations on debt levels.

A tax treatment on business trusts is generally more favourable to a trust.

On the plantation trust, sources said the structure would allow for the entity, which will be listed, to acquire more plantations in future.

“Eventually Felda would be the manager of the world’s biggest pure plantation trust company,” said a source.

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Business , felda , FGV , plantations , trust

   

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