THE Pakatan Harapan government presents a White Paper on the Federal Land Development Authority (FELDA) in Parliament on Dec 10 and, according to sources familiar with the matter, it will likely contain proposals to restore proper financial management and governance to the agency.

But the main concern is that the elephant in the room — the acquisition of a 37% stake in PT Eagle High Plantations Tbk for US$505.4 million (RM2.26 billion at the time) — will not be fully addressed (see accompanying story).

Nevertheless, one source says at least three proposals have been mooted to revive the beleaguered FELDA, which was founded in 1956 to resettle the poor and eradicate poverty, and which is the 33.67% parent of Bursa Malaysia-listed FGV Holdings Bhd (formerly Felda Global Ventures Holdings Bhd).

“There are three plans. One involves FELDA’s management being beefed up, the second the privatisation of FGV to get things back to where they were before its flotation in 2012, and the third, merging FELDA with another government-owned company that is involved in development … probably Felcra (Federal Land Consolidation and Rehabilitation Authority Bhd),” he says.

The first proposal, it seems, is like a public-relations exercise, where there is a lot of talk about sustainability, strengthening management at all operating levels of the agency, ramping up fresh fruit bunch (FFB) production and the oil extraction rate (OER), and reducing internal costs via improvements in efficiency to the highest level in the country.

To recap, FGV — which is FELDA’s main revenue generator — produced 4.26 million tonnes of FFB and processed 15 million tonnes of it to produce 2.99 million tonnes of crude palm oil (CPO) and 0.8 million tonnes of palm kernel from 450,000ha of plantations last year.

Average CPO production cost (ex-mill) for last year was RM1,592 per tonne while OER was 19.83%. It is noteworthy that FGV’s oil palm average age profile is 14.5 years. According to analysts, the planter is not as efficient as some of its peers.

Industry observers also attribute the mismanagement at the plantation group to both FELDA and FGV having the same chairman. But the reasons for the problems and corruption at both entities run deeper than that.
 

Privatisation of FGV?

While the notion of taking FGV private has been bandied about, the setback has been its high price tag. At its close of RM1.22 last Thursday, FGV had a market capitalisation of RM4.45 billion. With FELDA’s 33.67% stake fetching a market value of almost RM1.5 billion, the remaining shares would be worth RM2.95 billion. Assuming a 20% premium, the price works out to RM3.54 billion.

Note that government agencies such as pilgrim’s fund Lembaga Tabung Haji, Kumpulan Wang Persaraan (Diperbadankan), armed forces fund Lembaga Tabung Angkatan Tentera and several state governments are all shareholders of FGV.

FELDA, Koperasi Permodalan FELDA (KPF), which is held by FELDA settlers, and the various government entities control about 66% of FGV. This means that FELDA — if it strikes a deal with the government agencies and the cooperative — could take over the rest of the shares that have a market value of only RM1.51 billion. Assuming a 20% premium is forked out, this would entail a payment of RM1.81 billion.

However, there could be problems as FGV’s initial public offering was at RM4.55 apiece, which is almost four times higher than its current trading price. So, it would take some RM5.64 billion to privatise the 34% stake not owned by FELDA, KPF and the government entities at RM4.55 each.

It would also be difficult to explain as when FGV was listed in 2012, it was stated in its prospectus that 36% of its oil palm trees were between the ages of 21 and 25 and 16.9% were more than 25 years old.

So, 52.9% of FGV’s plantations were regarded as old six years ago. Now, how did FELDA not expect the group’s current predicament when there has been aggressive replanting that impacted earnings adversely?

When a senior editor with a newspaper saw FGV’s prospectus in 2012, he said, “This is the first time I have seen such an old age profile for trees — more than 50% of the trees are above 20 years old. It’s like FELDA is disposing of its ageing plantations.”

Indeed, FGV has performed poorly, largely due to its plantation profile and weak CPO prices. In its six months ended June 30, it suffered a net loss of RM21.9 million on revenue of RM7.04 billion. It had deposits, cash and bank balances of RM1.64 billion, and short and long-term debt commitments of RM3.1 billion and RM1.13 billion respectively.

FGV also owed RM109.28 million to a significant shareholder.  In the six months ended June 30, it forked out RM95.13 million in finance costs.
 

Listing was a mistake

Coming back to the White Paper, sources say it will likely state that the flotation of FGV was a mistake. They add that in 2009, FELDA’s net debt stood at RM1.5 billion, which translated into a gearing of 14%. However, as at June 30, borrowings stood at RM8.025 billion or a gearing of 46%.

FGV’s listing raked in RM5.99 billion cash for FELDA and RM4.89 billion for the company. While there are details of how the funds were spent, the explanations are “sketchy at best”, the sources point out.

According to the sources, the White Paper says research on the issues indicates weak management, bad corporate governance and misappropriation.

In FGV’s flotation exercise, all ancillary activities of FELDA and its plantations were injected into the company on a 99-year lease. This ensured that the agency would receive a fixed payment every year and 15% of the plantations’ operational profits. FELDA was also slated to receive 33.67% equity interest in FGV and enjoy the dividends and benefits of any share price increase.

But this has not happened, and FGV’s indicated gross dividend yield at its last price of RM1.22 on Thursday was 4.1% with payouts of between 1 sen and 10 sen per share since 2012.

Prior to FGV’s listing, it was paying FELDA yearly dividends of between RM100 million and RM150 million. Based on total dividends paid in FY2016 and FY2017, and FELDA’s 33.67% stake in FGV, it received RM12.3 million and RM61.4 million respectively.

It is also noteworthy that FGV has a 51% stake in sugar refiner MSM Malaysia Holdings Bhd, which ended trading at RM2.81 last Thursday, which translates into a market capitalisation of RM1.97 billion. Note that MSM’s stock is trading at its lowest level since mid-2011, hitting a low of RM2.80 in intra-day trade last Thursday.

Nevertheless, much of the issues at FGV only came to light when, as a publicly traded company, it was forced to reveal much of what transpired at the company, including its payments for assets, among others.

“I prefer FGV to remain listed because that will ensure good corporate practices and transparency. Or else, it will be like FELDA where there is no inkling of where the RM6 billion it received from FGV’s IPO disappeared to,” says a banker.

It seems the White Paper also states that FELDA only utilised 24% of the RM6 billion from the listing for expansion.

According to sources, nine companies were set up from 2013 but their businesses faltered and they now owe FELDA RM2.67 billion.

“The notion that FELDA is well run and FGV is the problem, that FGV’s listing brought about the agency’s problems, is nonsense. FELDA is badly run, full stop,” says a source familiar with FELDA.
 

Proposed merger with Felcra

According to its annual report, Felcra is principally engaged in the provision of plantation services, focusing on the integration, rehabilitation and development of land, as well as the processing and marketing of commodities.

Interestingly enough, both FELDA and Felcra are slated to come under the purview of the Ministry of Economic Affairs whose minister is Datuk Azmin Ali, say political sources.

According to its website, Felcra has 257,078ha of plantations. Its latest publicly available annual report for the year ended Dec 31, 2014, reveals that the authority registered an after-tax profit of RM123.86 million on revenue of RM1.75 billion.

It manages 220,086ha planted with oil palm, rubber and padi for a minimal management fee.

As at Dec 31, 2014, Felcra had cash and cash equivalents of RM1.07 billion, and long and short-term debt commitments of RM1.54 billion and RM57.87 million.

It is not clear how a FEL­DA-Felcra merger can be done or if Felcra is a well-run entity. This is important as the White Paper is said to talk about misappropriation and mismanagement at FELDA.

News reports have it that Felcra has been self-sufficient with zero allocations from the government since it was corporatised in 1997. Instead, it has a loan at 4% interest from the government.

According to news reports, Felcra’s recently appointed chairman Datuk Mohamad Nageeb Ahmad Abdul Wahab has undertaken a full management audit of the group and its subsidiaries, which is a precursor to rationalisation and restructuring.

There was talk of listing Felcra in the past but in a recent interview, Mohamad Nageeb said, “There is a strong perception that if Felcra were to go for a listing, then it will become another FGV.”