Which way will the winds blow for FGV?

  • Corporate News
  • Saturday, 17 Oct 2020

News of Syed Mokhtar’s interest in FGV had been in the air since September last year. It was reported the businessman was scouting for funding of more than RM1bil to facilitate the acquisition that could end up with him owning a 20% strategic block.

AFTER months of speculation, it is out in the open. Tan Sri Syed Mokhtar Albukhary has made clear his interest to acquire a major stake in FGV Holdings Bhd.

On Thursday, the tycoon formally put in an expression of interest to the board of the plantation group through Perspective Lane (M) Sdn Bhd, a unit of the businessman’s privately-owned Restu Jernih Sdn Bhd.

FGV’s board said it will explore and evaluate the proposal which would potentially make Perspective Lane its largest shareholder via an injection of plantation assets into FGV.

This private vehicle is wholly owned by the Tradewinds group of companies, which include Tradewinds Plantation Bhd and Central Sugars Refinery Sdn Bhd (CSR) – businesses in which FGV also has exposure.

News of Syed Mokhtar’s interest in FGV had been in the air since September last year. It was reported the businessman was scouting for funding of more than RM1bil to facilitate the acquisition that could end up with him owning a 20% strategic block.

Shares of FGV were then trading at below RM0.90 per share.

FGV is one of the world’s largest crude palm oil (CPO) producers, but its financial performance has been a far cry from what was envisaged at the time of its high-profile initial public offering in mid-2012 at RM4.55 a share.

A series of questionable investments, huge impairments and several changes at the helm hurt investor sentiment on the stock.

However, since 2017, things are improving with an ongoing transformation programme to return it to profitability.

FGV, which produces around three million tonnes of CPO a year, also controls a 51% stake in sugar manufacturer, MSM Malaysia Holdings Bhd.

In terms of landbank, FGV has 439,725ha of land in Malaysia and Indonesia.

However, it was only able to reap a net profit of RM20.5mil from a revenue of RM3.29bil for the second quarter ended June 30. It has been loss-making for the last two financial years.

Tradewinds Plantation, meanwhile, has some150,000ha of plantation land. A merged entity between the two would have some 590,000ha – close to what Sime Darby Plantation Bhd has in planted oil palm.

Going by market reaction on Bursa Malaysia, investors appear to be open to the development of a takeover of FGV. The stock rose upon opening of trade, rising to an intra-day high of RM1.15, before settling down at RM1.14, up 4 sen from the day before and giving the stock a market cap of RM4bil.

“Perhaps, FGV owners should keep an open mind to assess whether the entry of new blood could add value, ” says a former CEO of a plantation company, when asked his views.

Government-owned Federal Land Development Authority (Felda) currently has the biggest stake in FVG at 33.6%, while Koperasi Permodalan Felda Malaysia Bhd (KPF) holds a 5.52% stake.

KPF is a cooperative set up in 1980 with the aim of advancing the economic status of Felda settlers through equity participation and has around 270,000 members.

The cooperative also has interest in a handful of unlisted companies under FGV with stakes ranging from 28% to 49%, plus a 15.27% stake in MSM. FGV’s other major shareholders are Kumpulan Wang Persaraan (Diperbadankan) with a 6.43% stake, while Finance Ministry’s Urusharta Jamaah Sdn Bhd holds a 7.78% stake.

Hong Leong Investment Bank, in a report, said that based on Perspective Lane’s latest audited financial report, the company had a book value of RM1.96bil and reported a net profit of RM1bil for the financial year ending Dec 31,2018.

While details are sketchy at the moment, HLIB says the proposed deal could trigger a mandatory general offer (MGO), taking into account Perspective Lane’s RM1.9bil book value versus FGV’s book value of around RM4.2bil as at Dec 31,2019. For this, shareholders’ approval will be required at an extraordinary general meeting (EGM).

AmInvestment Bank says it is neutral on Perspective Lane’s proposed injection of plantation assets into FGV via share consideration.

“We believe the proposed asset injection may result in an enlarged share base, which may be earnings-dilutive.

“Also, we believe that a substantial portion of the oil palm estates are located in Sarawak, which sit on peat soil, ” it says in a report issued yesterday.

Assuming a market price of RM80,000 per ha, the research firm says that Tradewinds Plantation’s 129,975ha of oil palm estates may be valued at RM10.4bil, minus debts. “

It adds that assuming FGV issues new shares at RM1.23 per share (which is a 15% premium to its closing price on Thursday) the group may be issuing additional shares of more than eight billion. FGV’s current share base is 3.6 billion.

It also remains to be seen if the emergence of an entrepreneur as the single largest shareholder would go down well with some quarters, given that FGV is a government-linked entity.

With Felda settlers long regarded as a key rural support base where politics is concerned, any proposal related to FGV is a sensitive one. Interestingly, just about a month ago, FGV’s privatisation was an option Felda was mulling.

Strategic review

In a report in a business daily, Felda said a strategic review of the group was being undertaken, including exploring options to privatise FGV to boost the agency’s income.

However, it did not state if a decision on this had been made. One issue that would be a key consideration in this matter, however, is FGV’s land lease agreement (LLA). Of FGV’s total landbank of 439,725ha, about 351,000ha is leased from Felda under the LLA, which was part of the former’s listing requirement.

Towards this end, the planter entered into a 99-year leasing agreement with Felda in November 2011. In return, Felda receives a fixed annual payment of RM250mil from FGV, plus a 15% share of the operating profit.

However, due to the challenging environment and soft CPO prices, FGV payments have amounted to RM400mil a year, or half of the RM800mil Felda reportedly was expecting.

There is already a proposal by Felda to take back its plantation land. But if the agency decides to undo the LLA, it would have to pay a substantial amount in compensation, something it may not be able to undertake given its own tight finances.

“To extinguish the LLA, privatising FGV was an option Felda was looking at, ” says a source. It was reported that in 2018, Felda reported a net loss of RM5.7bil, while its turnover continues to be below RM2bil in recent years. As for KPF, net profit for FY18 fell about 48% year-on-year to RM57.4mil. This weaker earnings is not surprising as both FGV and MSM have not been performing well.

For the second quarter ended June 30, MSM reported a net loss of RM21.55mil, bringing 1H20’s losses to RM56.2mil. Analysts expect the company to be in the red for the full year, although losses are expected to narrow.

As for FGV, it returned to the black in 2Q20 with a core net profit of RM3.7mil from a core net loss of RM226.2mil in the same period a year ago.

Analysts expect 2H20 to be better due to its plantation division as fresh fruit bunches and CPO production is expected to normalise after a slow start in early 2020. Demand is expected to gradually recover as economies reopen after strict lockdowns in 1H20.

Syed Mokhtar’s bid comes at a time when things are turning around at FGV, albeit gradually, and the price of CPO is also stronger, which will support 3Q20 earnings.

The plantation group is also moving into other sectors of the agricultural business to diversify its revenue streams, but this may take time to bear fruit.

The tycoon’s business empire comprises assets ranging from ports, logistics, power and water generation assets, auto, property, hospitality, plantation, rice and sugar distribution and media, to name a few.

He derives the bulk of his wealth from stakes in listed conglomerates MMC Corp Bhd and DRB-Hicom Bhd.

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