Why taking FGV private is the best option

Another point of contention for FGV is the LLA with Felda, which is now about to be terminated. Over the years, FGV has paid some RM2.09bil in lease payments and RM507mil in the share of operating profit to Felda

LISTED on June 28,2012, FGV Holdings Bhd was then the world’s second-largest public issue for the year, having successfully raised RM10.4bil, and was ranked as the 25th largest market capitalisation company on Bursa Malaysia with a value of more than RM16bil.

Some RM6bil from the initial public offering (IPO) proceeds went to Felda itself, while FGV raised RM4.33bil in net proceeds from the public issue. In its first financial year-end post-listing in 2012, FGV had total shareholders’ funds of RM6.1bil, while its total cash balance stood at RM5.69bil and total debts, excluding the land lease agreement (LLA), was just under RM2.44bil. Effectively, FGV had net cash of RM3.25bil back then.

Fast forward into its latest quarterly results and one would be able to observe how the financials of the former KLCI index-linked stock has deteriorated in just over eight-and-a-half years. Shareholder funds have dropped to just above RM4bil or down by 34%. Its cash balance has been reduced by RM3.84bil or by two-thirds to just RM1.84bil while total debts have doubled to RM4.88bil.

Effectively, FGV has turned into a net debt company with a net gearing ratio of about 0.75 times. As at the end of the first-half of 2020, FGV’s net debt stood at RM3.03bil, which is a reversal of the RM6.28bil from its net cash position of RM3.25bil as at end-2012.

So, what happened?

FGV’s share price peaked at RM5.55 on July 5,2012, just a few days post-IPO, giving it a market capitalisation of RM20.25bil at that point in time. Today, FGV was last traded at RM1.18 per share or 74.1% lower than its IPO price of RM4.55 per share, translating to a market capitalisation of just RM4.3bil. Hence, from its peak price, FGV has lost some RM15.9bil in market value alone.

As we know, post-listing, FGV embarked on some questionable deals with the acquisition of several plantation-based companies or assets. Other than small acquisitions, FGV carried out four major acquisitions and five major disposals between October 2013 and September 2019. These are summarised in the tables.

Hence, on a net basis, FGV spent some RM3.07bil buying plantation-based companies or assets. Looking at the financial aspect of FGV’s acquisitions, questions were asked even then on why these assets were purchased at such inflated prices, especially those related to Pontian United Plantations Bhd (PUP) and Asian Plantations Ltd (APL), where FGV was paying almost three times and 11 times book value, respectively. In terms of historical earnings (as per disclosed in their circular to shareholders), FGV paid 21.7 times earnings while that of APL was meaningless, as the company was loss-making.

FGV also spent RM2.2bil buying the remaining 51% stake it did not already own in Felda Holding at a valuation of 1.2 times and 11.1 times PER, while its acquisition of Yapidmas, ie, the purchase of a piece of land owned by Golden Land and its four wholly-owned subsidiary companies, was done at 2.2 times book value and 32.6 times earnings.

On asset disposal, FGV has not been really a good seller in the market, as its gain on disposal of five of the assets was less than RM100mil.

Having bought these assets, FGV’s fortunes did not improve and deteriorated further. From making almost a billion ringgit in 2012, FGV’s fortunes turned negative over the past two years with losses of RM1.08bil and RM246mil in financial year 2018 (FY18) and FY19, respectively. The losses in FY18 were also dragged by impairment in some of the big-ticket item purchases by FGV in the prior years.

Interestingly, since its listing, FGV has made a total profit of only RM948mil over the past eight-and-a-half years, while in terms of dividends, it has paid out almost RM1.9bil.

Another point of contention for FGV is the LLA with Felda, which is now about to be terminated. Over the years, FGV has paid some RM2.09bil in lease payments and RM507mil in the share of operating profit to Felda. Of course, this excludes the amount of monies that FGV has spent on replating and cost of fertilisers as well as housing and salaries paid to staff located on these LLA landbank.

Since the change in management, FGV has been trying to correct the wrongs and taking actions in terms of some of the questionable acquisitions, especially in relation to APL. According to FGV, the goodwill arising from APL’s acquisition of RM513mil has now been fully impaired.

In addition, at the time of acquisition, the fair value of the net assets of APL in actual fact included external borrowings of RM517mil assumed by FGV, which basically meant that the enterprise value of the APL acquisition was in actual fact RM1.08bil. Basically, APL was a mistake, and the deal should not have gone through at all.

FGV was also involved in acquiring the much talked-about Eagle High Plantations Tbk to the tune of more than US$500mil, but luckily, the deal was aborted at the FGV level and instead taken up by Felda. FGV’s main shareholder is Felda itself with a 33.7% stake. Based on the current market price of FGV, the value of shares not already owned by Felda is approximately RM2.86bil.

It has been reported that FGV expects a payout of between RM3.5bil and RM4.3bil from Felda should the LLA be terminated by Felda. What is mind-boggling is that the payout FGV is looking for is even larger than the value of FGV shares that are not owned by Felda.

However, as highlighted by Tan Sri Wahid Omar, the chairman of the Special Task Force, the compensation will be less that what has been disclosed by FGV. In addition, Felda also intends to acquire palm oil mills located in the LLA landbank.

With the LLA termination, FGV is left with just about 20% of its landbank to continue its business operations while the compensation received effectively would just perhaps address its net debt level. It’s effectively FGV returning to its original self before the IPO scheme was structured and without the complicated LLA in the picture.

To-date, other than receiving RM2.59bil in LLA payment and share of operating profits, Felda itself has gained some RM640mil in the form of dividends over the past eight-and-a-half years, while the sale of FGV shares under the offer for sale portion in the 2012 IPO netted Felda some RM6bil in cash proceeds.

Felda also “enjoyed” the labour that FGV had put in in the form of the cost of fertilisers, replanting and not to mention hosting the staff under the LLA scheme in terms of wages and housing. With more than RM9.2bil in cash proceeds, clearly Felda has gained significantly from the time FGV came to market to the present time.

Assuming Felda spends the equivalent to all the dividends and LLA payments it has received and the share of operating profit to-date to acquire the remaining 66.3% now already owned, Felda would spend some RM3.23bil, which translates to RM1.34 per share. This would still be lower than the figure bandied around for the expected compensation that FGV was expecting from Felda. The price of RM1.34 per share can be said to be a fair price considering most analysts have a fair value that ranges between RM1.00 and RM1.21 and is also 21.8% above its latest net asset value per share of RM1.10 as at end June 2020.

It’s time to take FGV private, as the LLA scheme is not in its best interest, while leaving the company listed is no longer viable given the size of its remaining business operations.

Pankaj C Kumar is a long-time investment analyst. Views expressed here are his own.

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