Is FGV’s proposed takeover price fair?


Uncertain outlook: FGV headquarters in Kuala Lumpur. The world’s largest CPO producer has failed to live up to its promise with its business prospects still full of uncertainties despite a turnaround in its latest quarterly earnings.

IN the latest twist in the Federal Land Development Authority (Felda)-FGV Holdings Bhd saga, the former has laid out a plan to launch a mandatory takeover offer (MGO) for all FGV shares.

This is provided if Felda secures two blocks of FGV shares from two state-linked agencies, Retirement Fund Incorporated (KWAP) and Urusharta Jamaah Sdn Bhd.

According to Felda, it proposed to acquire a 6.1% stake held by KWAP and 7.78% held by Urusharta at a whopping RM658mil cash.

After securing the shares, Felda will hold more than 50% stake in FGV, triggering the MGO.

Assuming the MGO takes place, the big question that arises is, is the RM1.30 price that Felda intends to pay for all the shares in FGV a fair price?

Eight years ago, FGV was listed on the market at a lofty price of RM4.55 per share and soon after listing, its share price had even shot up to as high as RM5.50 per share.

But since then, the world’s largest CPO producer has failed to live up to its promise with its business prospects still full of uncertainties despite a turnaround in its latest quarterly earnings.

This is why most analysts reckon that RM1.30 share price is a fair one.

Adrian Kok, an analyst at Kenanga Research, justifies that the big gap between the offer price and FGV’s initial public offering (IPO) listing price is fair because of FGV’s deteriorating financial position and its questionable acquisitions in the past.

“Given the financial matrix of FGV at this juncture, the price is fair; it implies a price-to-book value of 1.1 times for financial year ending Dec 31,2021 (FY21) estimates, which reflects the group’s current prospects.

“FGV’s return on equity and return on assets have deteriorated to around 5% and 1% for FY20 estimates, ” he told StarBizWeek.

The takeover offer is a “cleaner” way for Felda to restructure its assets compared to terminating the land lease agreement with FGV, says Ivy Ng, who is the head of CGS-CIMB Research.

“The price is fair in our view because even if Felda does not take over FGV, the land lease deal would still be negative for FGV in our view, ” she notes.

FGV’s hurdle is the 360,000ha land leased from Felda under a 99-year land lease agreement (LLA). This was done to uplift the company’s valuation for its listing in 2012.

Under the agreement, FGV has to pay a fixed annual income of RM250mil plus 15% share of its profits to Felda.

Felda had a choice of restructuring its assets by either terminating its 99-year LLA with FGV and taking over its palm oil mills or a takeover offer of FGV. It chose the latter as it was a cheaper option than terminating the LLA.

Based on an offer price of RM1.30 per share, CGS-CIMB Research estimated that Felda would have to pay less to take over FGV at RM3.1bil, compared with between RM3.5bil and RM4bil for cancelling the LLA with FGV.

Besides that, Ng says the deal would provide an avenue for FGV shareholders to exit their position.

“This is probably a better option for FGV shareholders than having FGV’s share price being negatively impacted by concerns over the termination of the LLA or dispute over compensation terms, ” she notes.

On the next course of action for FGV, its chief executive officer Datuk Haris Fazilah Hassan told StarBizWeek: “As this is a shareholders matter, we will follow the process to appoint independent adviser to evaluate the MGO proposal and advise the minority shareholders at an EGM where they will vote on it.”

Athough from a corporate view point, the takeover price is fair, but taking into account the sentiments of the Felda settlers, it may not be an attractive offer.

However, the element of “uncertainty” for the takeover still exists as there is still no confirmation from banks that such financing can be draw down, says Ng. “To me, its regulation and financing that could be a stumbling block to the deal, ” she adds.

It is noteworthy that Felda has a staggering RM10.6bil debt and will issue RM9.9bil sukuk under its recovery plan.

Although Felda’s settlers have received dividends over the years and cash payments, former Felda chairman Tan Sri Shahrir Samad wishes there was a high takeover price because of the incurred capital loss of RM1,164 for settlers.

“In 2018, we halved the price paid for settlers to RM2,755. So for their 800 shares, their capital loss is about RM1,164.

“Consolation is the amount of dividends they have received over the years, not just from their own shares but from the 20% FGV shares kept in trust for settlers, plus the RM15,000 per family from listing proceeds that Felda received. Still, I wish it was a higher takeover price and the current share price is trading lower, ” he explained.

Yesterday, at close, FGV was trading at RM1.19 per share.

During FGV’s IPO, over 110,000 settlers received 800 shares each amounting to some 90 million shares while Felda itself holds about 730 million shares in FGV.

Each Felda settler was entitled to 800 FGV shares at RM4.55 per share.

Back then, most Felda settlers had to take out loans from commercial banks to subscribe for the FGV shares.

However, Felda decided to take over these loans from the banks given settlers’ difficulties in servicing their loans. Settlers were then required to pay RM50 per month to Felda as repayment for their FGV shares.

To further lessen settlers’ investment costs of holding FGV shares, Felda announced a scheme whereby the settlers’ cost of investment in the 800 FGV shares would be reduced by half to RM1,820.

“We paid off half the debts already. So, I believe there is still another half, ” Shahrir points out.

He hopes Felda could provide some form of compensation to the settlers to mitigate the capital loss.

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