Between FGV and Felda – who needs who more?


Sticky issue: People walking near Menara Felda in Kuala Lumpur. For Felda, which is the single largest shareholder of the world

It looks like both entities need to maintain the status quo to remain viable and meet the expectations of settlers 

A DICHOTOMY of sorts emerged in the shareholders’ meeting of FGV Holdings Bhd.

The shareholders did not approve the remuneration for the board, ranging from the fees of the directors to their benefit payments.

However, chairman Datuk Wira Azhar Abdul Hamid and other directors were voted in with an overwhelming show of support.

So, in a nutshell, the shareholders want Azhar, who is the new guy at the helm of FGV, to continue his work, but they don’t like his remunerations package or the fees that the directors earn.

Where does this leave Azhar? Does he continue with his position and work for free or leave the post, which he was appointed to in September 2017?

Only Azhar can answer the question on whether he wants to carry on as chairman and be the face of FGV when the shareholders, including Felda, have opted not to reward him.

As for Felda, which is the single largest shareholder of the world’s largest plantation company by size, the question that comes into play is, how is it going to retain a set of professional board members in FGV if remuneration is a sticky issue?

Azhar was appointed after FGV went through a series of governance issues during the previous leadership.

At that time, Tan Sri Mohd Isa Abdul Samad was the chairman during which FGV went on an acquisition spree. Azhar came in as the government, which controls Felda, wanted to instill professional managers to the board.

Does Felda still want to attract professionals to the board? Based on the voting pattern, it is clear that Felda did not have
control over the voting.

Apart from Felda, which holds 34%, the other notable shareholders in FGV are Koperasi Permodalan Felda (KPF), Kumpulan Wang Amanah Pencen and Lembaga Tabung Angkatan Tentera (LTAT) and several state governments. The government funds collectively hold more than 60% of FGV.

It is easy to understand why the likes of KPF and LTAT voted against rewarding the board, considering that their cost of investment in FGV is at RM4.55 per share, while the market price today is a measly RM1.15.

However, it has been reported that even Felda voted against rewarding the board.

There could be several reasons to the resolutions not being approved by shareholders.

One of it is that directors in GLCs cannot expect to be paid if the company does not make money.

FGV posted a loss for the financial year ended December 2018 to the tune of RM1.08bil. Its profitability has been coming down since 2013. The losses were due mainly to impairments of assets acquired by the previous management.

Azhar’s strategy to return FGV to the black is simple. He wants to bring down the operating cost and improve the yields on all fronts such as collection of fresh fruit bunches and the oil extraction rate.

But it is not easy.

The employees of FGV are mostly from the Felda schemes. They have been in their position for years and are set in their ways of operating the fields. Bringing down cost and improving efficiency is easier said than done.

Also, one has to take note that Felda settlers are an important voting block influencing 54 Parliament seats. They have to be handled with care.

As for Felda, it gripes that the returns it gets from leasing the plantations to FGV as part of the listing exercise in 2012 are not sufficient for it to manage the programmes for settlers. According to previous reports, Felda needs about RM2bil a year to manage its programmes with the settlers, which includes it acting as `banker’ of last resort for them.

As part of the listing, Felda placed 351,000ha under FGV. In return, it was to get RM249mil per annum under a land lease agreement (LLA) and 15% of FGV’s operating profit.

However, FGV’s profitability has been on a downtrend until it recorded a loss in 2018.

Felda wants the plantations it has leased to FGV back, contending that it can do better than the present situation. However, it does not have the finances to pay the compensation to unravel the LLA.

As for FGV, it says that it can carry on to become a more successful plantation company if the LLA is cancelled and the plantations
are handed back to Felda, with compensation.

According to Azhar’s latest statement, FGV will focus on its downstream business as it owns all the mills located nearest to the Felda plantations.

FGV will also be left with close to 90,000ha of plantations.

However, FGV also has long and short-term debts amounting to RM4.4bil to service and repay. It would receive compensation from Felda should the LLA be rescinded.

However, the amount depends on FGV’s earnings, which is not working in favour of the company now as it recorded a loss last year.

To unravel the LLA, this year is probably the best time for Felda to push the button.

But can it manage the plantations without FGV? Would it have the discipline to replant the trees and cut down on staff? A sizeable portion of the plantations under the LLA are old trees of more than 25 years. FGV spends RM300mil to replant the trees. Will Felda continue with the replanting efforts? Bringing down cost is another factor. Today, FGV’s staff cost for its upstream operations comes up to almost RM1bil and accounts for 61% of its total staff cost. Will Felda be able to bring down the staff cost? On the face of it, it would appear that the LLA can be unravelled and both Felda and FGV can go their separate ways.

However, would both entities be able to make enough money to pay off their liabilities and meet the commitments to settlers?

That is unlikely.

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