FGV Holdings Bhd will be able to forge ahead, even if its 99-year land lease agreement (LLA) with the Federal Land Development Authority (FELDA) — its major shareholder — is terminated, says CEO Datuk Haris Fadzilah Hassan.

He acknowledges that the proposed move by FELDA to take back its plantation land, spanning 355,000ha, was raised at a recent stakeholder engagement meeting attended by FELDA chairman Datuk Seri Idris Jusoh and special task force head Tan Sri Abdul Wahid Omar, among others.

Currently, FGV generates 30% of its total fresh fruit bunch (FFB) output from the LLA land, says Haris, underscoring the fact that the land subject to the LLA applies only to plantation estates, not the mills owned by FGV.

“We feel in terms of the relationship [with FELDA], it will still be the same even when the land goes back to FELDA. Because of the proximity of our mills [to the plantations], it will still send [its crude palm oil from the plantations] to our mills,” he tells The Edge in an interview.

“As it is, 70% of the supply chain comes from outside, but we have to follow the agreement in that there is already some provision on how to calculate the [requisite] compensation.”

FGV’s 2012 listing prospectus shows that the LLA is for 99 years, starting from 2012, and the first point of negotiation on the terms of the LLA will come only about 20 years into the agreement.

Under the LLA, FGV has to pay RM248 million a year as a fee, as well as a 15% quantum of operating profits to its 33.66% parent FELDA in return for using the latter’s land bank.

While FELDA was looking at fees and its 15% share, reaping as much RM800 million and northwards, the challenging environment and soft crude palm oil (CPO) prices have resulted in FGV payments of only about RM400 million a year, or half what FELDA was expecting.

Nevertheless, if FELDA does decide to undo the LLA and reclaim its land bank, it would have to pay billions in compensation, which it may not be able to afford at this point in time. That is apart from having to give at least six months’ notice if it wants to see the return of less than 10,000ha and 18 months’ notice for more than 10,000ha.

FELDA has its own set of issues, which include ongoing arbitration proceedings from its acquisition of a 37% stake in Indonesian company PT Eagle High Plantations TBK from the Rajawali group, the vehicle of businessman Tan Sri Peter Sondakh, for US$505.4 million (RM2.26 billion then), which was 95.86% higher than the market value of the company’s shares.

The dispute between FELDA and Indonesia’s Rajawali group stems from the former’s decision to sell back its shares in Eagle High Plantations, exercising a put and call option, which was part of the agreement, and, importantly, at the original price of US$505.4 million. Arbitration is ongoing at the Singapore International Arbitration Centre.

FELDA had filed a notice in April last year to sell back its 37% in Eagle High to Rajawali, which challenged the exercise.

In April last year, the then ruling Pakatan Harapan government had to allocate RM6.23 billion to support several initiatives for FELDA to restructure and strengthen its operations. There was an outcry when it was announced that FELDA’s liabilities had surged 11 times to RM14.4 billion in 2017 from a mere RM1.2 billion in 2007, largely brought about by mismanagement.

These bits of information came to light in the tabling of the FELDA White Paper.

FGV will have to be compensated

While FGV has suffered losses in the financial years ended December 2018 and 2019 (FY2018 and FY2019), TA Securities forecasts that the plantation giant will rake in RM72.9 million in net profit in FY2020, rising to RM134.5 million in FY2021 and RM159.1 million in FY2022, that is, with the LLA still intact.

In the event that the LLA is terminated, FGV’s compensation would be calculated based on the average profit per mature hectare for the entire leased land (based on its latest audited financial statements at the point of notice) multiplied by the loss of FGV’s future profits.

The group will be compensated for 10 years in future profits if the LLA is terminated less than eight years from the last replanting, and five years of future profits if the agreement is terminated more than eight years from the land’s last replanting.

FELDA is also obligated to take over the employment of relevant plantation staff with the same employment terms or better than what was offered previously if the LLA is terminated.

Haris points out that if FELDA decides to terminate its LLA with FGV, it would be a huge financial undertaking, adding that FGV has communicated to FELDA that, should there be any variation in the LLA, it would be subject to shareholders’ approval.

FELDA would also have to assume maintenance and upkeep costs as well.

FGV spends RM300 million a year in replanting activities, RM250 million to RM300 million in fertilising activities, RM270 billion in worker housing, and RM590 million in salary costs for plantation staff, amounting to nearly RM1.5 billion in operating costs.

“It is not only that they have to pay the compensation, but they are also looking at operational costs of RM1.5 billion. So, we said that you [FELDA] need to be aware of this,” Haris says.

Should the LLA be terminated, Haris says, FGV would have a stronger balance sheet, as it would not have to spend on replanting, fertiliser, worker housing and fertiliser costs.

“I will not have RM1 billion in replacing, fertiliser, housing and salary costs, but I will be much leaner because the mill is still with me. In a way, [they still need FGV,] unless they decide to build a new mill … But, to me, [such an] investment is wasteful because there is already a mill there ... You are doing that because you don’t want the fruit to go to us, which I think, financially as a business, does not make sense,” he says. He adds that FGV, in this instance, would be a private miller company that is asset-light in nature.

On how serious FELDA is about terminating the LLA and what is driving such a move, Haris says the issue seems to pop up every two years, but adds that FELDA is quite serious about evaluating all options available to it, including the termination of the LLA this time around.

Haris says certain quarters feel they can manage the LLA land better than FGV. Ultimately, it is about the people managing the land who ended up working for FGV since the agreements started, and will shift back to FELDA should the LLA be terminated.

Haris says: “So, I am not sure how much better they [FELDA] can do [compared to us]. The only thing they would benefit from is the tree-age profile, which has improved.

“At the point at which the LLA was signed in 2012, more than 53% of the trees were considered old, and we have been replanting about RM300 million, or 15,000ha, every year, so we brought down the age profile ... The age profile has very much improved.”

FGV has brought down the average age profile of the oil palms on the estates it manages to 13.2 years, from 16.3 years previously, and replanting is set to continue until 2026.

“This is something they will benefit from, where the LLA is silent on replanting costs but, definitely, this is something that [we] would like to claim compensation for,” says Haris.

Based on the annual RM300 million replanting costs since its 2012 listing, FGV has spent RM2.4 billion. Given FELDA’s 15% profit share, FGV assumes 85% of the costs.

Another issue not clearly spelt out in the LLA is housing. The CEO noted that because of the Roundtable on Sustainable Palm Oil (RSPO) regulations, FGV has had to upgrade worker housing at a cost of RM270 million.

Consequently, in areas in which the agreement is vague or silent, FGV would have to engage in negotiations with its largest shareholder, noting that there is an arbitration clause present as well.

While he could not say whether negotiations on LLA compensation would end up in arbitration proceedings, Haris says FGV is prepared for such an eventuality.

He notes that in the past 1½ years of his mandate as CEO, the termination of the LLA has been brought up once in a while, likening it to a “cloud that is always there”.

Haris notes that, if FELDA were to terminate its LLA with FGV, the latter could have RM4 billion to RM5 billion in cash, which could be used to buy a plantation that has level terrain, is well-connected and is suitable for monetisation.

“That is some indication of the plans we want to do if we have RM4 billion. It is a fresh start ... It is like another IPO, because from the IPO, it generated RM10 billion, FELDA got RM6 billion and FGV got about RM4.2 billion, but then, hopefully, this time around it will be well spent.”