PETALING JAYA: The turnaround plan for FGV Holdings Bhd has yet to bear fruit with its share price likely to stay range-bound.
According to CGSCIMB, the market is also keeping a close eye on the decision by its 33% shareholder Felda on the status of the land lease agreement (LLA).
“The positives are FGV’s new management team plans to cut the workforce by 10%, reduce costs by RM150mil and divest non-core and non-performing assets for proceeds of RM350mil,” said the research unit.
CGSCIMB, which has a “hold” call on FGV, pointed out that the key risk is that Felda may consider taking back the plantation land it has leased out to FGV.
“Our rough calculation suggests the LLA compensation based on last year’s profit could be close to RM2.1bil.
“We also tweak FGV’s sum-of-parts (SOP) up slightly to RM1.18 to reflect the changes in sugar and downstream asset valuations.
“We feel that the risk and reward is balanced at this juncture and maintain hold as we believe the market has partially priced in expectations that the management team will deliver better results in FY2019, but this is offset by the risk should Felda decide to take back the land leased to FGV,” added the research unit.
To recap, FGV entered into the LLA with Felda on Nov 1, 2011 to lease around 350,000ha of estates from Felda.
The LLA commenced on Jan 1, 2012, ahead of the listing of FGV on Bursa Malaysia in mid-2012 at an initial public offering price of RM4.55 per share.
Following the release of Felda White Paper on Apr 10, it was reported by the media that Felda will be reviewing the LLA with FGV for a fairer deal.
CGSCIMB pointed out that “we gathered from FGV CEO Haris Fadzilah Hassan at the recent results briefing that it has not entered into any formal re-negotiations with Felda with regards to the LLA.
“However, Felda has written to FGV to request information relating to the assets. This suggests to us that Felda is reviewing the status of the LLA and has yet to make a decision on this issue.”
Haris had also indicated three potential scenarios: 1) for the LLA to remain status quo, 2) for the LLA terms to be renegotiated and, 3) for Felda to terminate the LLA.
Under scenario 1, CGSCIMB is of the view that there will be no changes to its earnings forecasts.
However, under scenarios 2 and 3, the research unit expects it will most likely be negative to FGV as it could reduce its future profitability.
While FGV is not able to share the potential compensation that Felda may need to pay if it chooses to terminate the LLA, but it cited that this will depend on the notice period and other items. However, under the terms of the agreement of the LLA, the provision for Felda to review the LLA terms was from the 20th year onwards, which CGSCIMB estimate to be 2032.
Secondly, the research unit gathered that any changes to the terms of LLA would require shareholders’ approval at an EGM. T
“This could rule out the likelihood of scenario 2 and brings us to the potential impact of scenario 3 (termination of the LLA),” added the unit.
In CGSCIMB revised SOP valuations, it has raised the valuations for FGV in view of the better performance from downstream assets, to 0.6 times price-to-book-value instead of 0.5 times price to book value previously.