CIMB Research cautions negative impact if Felda ends LLA with FGV

At 5pm yesterday, the stock ended five sen up to RM1.31, with 31.5 million shares done.

KUALA LUMPUR: CIMB Equities Research is cautious if the Federal Land Development Authority (Felda) terminates the land lease agreement (LLA) with FGV Holdings Bhd.

It said on Monday its current stance is that the termination of LLA is negative for FGV and plans to move downstream are likely to take time to bear fruit.

CIMB Research issued the report following FGV chairman Datuk Wira Azhar Abdul Hamid’s second letter to shareholders filed with Bursa Malaysia last Friday.

In the letter, he revealed that the group is confident that it will remain on track to be a high performing company even if Felda, its major shareholder, decides to terminate the LLA, for suitable compensation. 

This is because the group will still own the refineries and the mills, which are processing the fresh fruit bunches from the LLA land. FGV also revealed that it plans to accelerate and scale up its downstream business, should the need arise.

(FGV has a total landbank of 439,725 hectares (ha). About 351,000 ha is leased from Felda under the LLA. FGV has committed to pay Felda RM248mil a year to lease the land, of which about 291,000 ha is planted with oil palm.)

Azhar also revealed its three-pronged strategy: (1) it is working on a strategic plan to allow FGV to realise its full potential through generating more income from its leased estates or creating more value from its products; (2) it plans to provide more details on its strategic plans by the end of this year; (3) it is also looking to potentially make the strategic shift towards becoming a major downstream player.

On its operational performance, Azhar was disappointed that FGV did not post a profit in 1Q19, due mainly to lower crude palm oil (CPO) price.

 However, he said FGV was on track to meet its FFB output target of 4.79 million tonnes for 2019 (+14% on-year) vs. 5M19’s achievement of 1.69 million tonnes (+8%). 

Azhar had also stated FGV was on track to save RM150mil in procurement costs and has achieved RM60.7mil cost savings in 5M19, or 40.5% of its targeted annual cost savings.

He added that the group is on track to realise the value of its non-core assets and underperforming joint ventures. It has signed one SPA in early June. 

To recap, the group targets to raise RM350mil proceeds from this exercise.

“We would be positive if FGV can achieve the aggressive FFB output target of 4.79 million for 2019. This will require the group to post 17% on-year output growth for the June-Dec 2019
period. For 5M19, the group’s FFB output growth achievement of 8% is slightly behind the industry’s performance of 9%. 

“We maintain our Hold call as market has priced in expectation of better results,” it said.