Cover Story: Creating new income streams, taking steps to stem losses

TheEdge Thu, Aug 13, 2020 03:00pm - 3 years View Original


A couple of weeks ago, FGV Holdings Bhd CEO Datuk Haris Fadzilah Hassan sat down with The Edge on the 21st floor of Wisma FGV in Kuala Lumpur for an interview that went on for almost two hours.

Haris was, as always, straight-talking. Following are excerpts from the interview.

 

The Edge: In the past, FGV had issues with FELDA. How are things now?

Datuk Haris Fadzilah Hassan: Together with our chairman (Datuk Azhar Abdul Hamid), we went and presented the status of FGV [to FELDA chairman Datuk Seri Idris Jusoh] because they (FELDA) are the biggest shareholder at 33.66%; [so] we updated him (Idris) on everything.

It was very good, it was refreshing to hear the way that he wants to engage with FGV, and really work closely with FGV, which I think is quite a good platform.

 

What’s with Bright Cow?

We have started diversifying our income potential. Our business is very much palm-based. Of course, we have our logistics business, we have MSM (Malaysia Holdings Bhd), but over the last 1½ years, we have grown another two [streams of income], which are integrated farming and FMCG (fast moving consumer goods).

Integrated farming is basically to maximise the profit that we can get per hectare. We pay a land lease to FELDA, so if I can generate more revenue from the same hectare of land, then it will cover a lot of expenses.

We have gone into dairy farming as well. We bought into the Bright Cow brand of products, which has a farm in Linggi, Negeri Sembilan, but it (the acquisition) is basically to add value to our own animal feed business.

We have new products coming in for the animal feed, and this is the next big thing that we want to promote as part of the circular economy, where we turn what used to be a by-product in terms of waste, to wealth.

 

Is there any capital expenditure (capex) deployed for this animal feed business?

The only capex incurred so far is for Bright Cow, where we have spent about RM12 million to buy cows.

 

Why has FGV been so badly affected financially compared with other plantation counters?

If you take the last five quarters, four quarters were losses and one, which is the last quarter, was a positive. But there are many parts to that. One of the reasons why we are different when compared to the other plantation companies is the LLA (land lease agreement) commitment. Before we can show our first ringgit of profit, we need to first minus RM248 million, and then from there is a 15% share of profits.

Even for analysts, they see this as land we don’t own, we don’t have a premium from land appreciation because we are not going to benefit from land appreciation [costs] compared to other companies. That means you will not have opportunities for property play, for example.

The second reason why we are different is the age profile. We have to spend a lot in terms of replanting, and this adds more to our costs per hectare.

The other one is the opportunity to implement mechanisation, because the LLA land is about 351,000ha, [and] only about 48% is considered flattish. Due to the hilly nature, we cannot do mechanisation, so our costs are a bit high.

 

Is this also because of some of the plantations you acquired?

We also bought plantations — after the IPO, we bought about 80,000ha of new plantation, but some of those ventures were not paying the returns we were expecting. This is one of the ongoing court cases.

With the new Roundtable on Sustainable Palm Oil (RSPO) standards with regards to, let’s say, new planting, we have even less hectarage that we can plant because under the new rules, any gradient which is more than 25°, we cannot plant oil palm. So we are looking at 86,000ha of land which cannot be replanted. If we talk about 350,000ha in total, it is more than 20%, maybe 25% of the hectarage.

 

How are things at (your 51%-owned unit) MSM?

At MSM, sugar is a controlled item, but there are five layers of distribution in terms of middlemen before it reaches the consumer. Let’s say the cost coming out of the factory is RM2,000, the market ceiling is RM2,800, there is about RM700 to RM800 that is being passed among the distribution layers.

Also, for our procurement, for example, last year through tightening our procurement and combining purchases, we managed to save RM170 million.

What we are encouraging FGV (to do is) to go beyond (what it is currently doing), try to offer services to other companies as well and move away from just palm oil in terms of FMCG and continuing non-palm oil.

 

FGV wanted to sell its stake in MSM at one point of time …

At the time, we were looking to sell up to a certain percentage so that we don’t remain a 51% shareholder, it becomes an associate. But the prices that we were getting were quite low at that point, but we are still open for a strategic partnership because when the Johor refinery came on board, that added one million tonnes of new capacity to MSM.

 

What happens to the refinery in Perlis?

The Perlis plant is small, it is only about 200,000 tonnes. That plant is going to be decommissioned [and the land used] for our integrated farming. This is a huge tract of land that we can utilise to do large-scale food industries, cassava.

 

What sort of impact to your bottom line will this have?

We expect a return of 15%. When we look at the palm oil business, I mean in the last 10 years, even if we become the best player in this industry, when we look in terms of returns, it is 4%. And it has not been growing over the past years because CPO prices rarely go above RM3,000 per tonne.

 

So you are basically moving away from plantations?

We are not moving away from plantation. But we are moving away from the dependence on the commodity part.

 

Do you have an earnings target for this new business?

By 2023, we target 15% of Ebitda (earnings before interest, taxes, depreciation and amortisation) coming from the integrated farming business.

 

Where would the M&A (merger and acquisition) opportunities be? What sorts of players are you looking at?

At the moment, we are looking at Malaysian companies that have exposure in export markets. There are a few under this current economic situation.

Palm oil is still our main business, don’t get me wrong. Until the LLA land is taken, palm oil is our main business because 70% of the fruits from the non-LLA land, even if they (FELDA) take the LLA land, I still feel the fruit will still come to our mills. Secondly, we have been planning to diversify our sources of income and because the window is not open very long.

 

Have things gone according to plan this past one year-plus that you have been in charge?

This MCO did put a damper [on things]. By now, we should have already executed another big chunk of our strategy, which is to sell our EFB, the empty fruit bunch, to China for pulp for paper. China is also closed, so we cannot work, but that is a big renewable strategy that we have, because we produce more than three million metric tonnes of EFB.

We have tied up with the fifth-largest paper producer in China, so they will buy one million to two million metric tonnes.

 

How significant is your selling EFB to China?

Very significant.

 

Will you be looking at disposing the other non-core aspects of your business?

There are two things we are currently looking at (disposing). One is the joint venture with Tabung Haji [Trurich Resources Sdn Bhd], (and) APL (Asian Plantations Ltd) — about five companies were looking at it.

The other big chunk is the Cambridge Nano System; we are looking to sell. The final buyer has already paid the deposit.

This is what my game plan was when I came in. 2019 to stop the decline, 2020 to sustain the performance and 2021 is to grow effectively. This is my three-year mandate under the Business Plan 2021. We are now well in the middle of 2020. These are some things that we are doing, that is, integrated and FMCG, logistics, e-commerce, expanded trading presence. This is why we are going to India, this is another development.

We have a local venture there. Our intention is to become an Indian company in India. We set up a company in India, and we want to be involved in the whole value chain. India also has a vision to be self-sufficient because they are one of the biggest importers of oils and fats. The government wants to plant oil palm, but the weather conditions there are not suitable because it is dry. This is where the drought-resistant planting material will come into play, because we want to create from the bottom up, which will help the state of Telengana.

From there, we want to be a local player for their food industry too. We are trying to think from planting material, R&D, mill, which are all the capabilities that we have to develop the local palm industry in India. It may not be as high-yielding as Malaysia because of the weather, but with the right planting material, which is suitable for dry conditions, coupled with irrigation, there is promise because the government there is very serious.

The partner is called Pre Unique India Pvt Ltd. They are already a player fabricating palm oil mills in India, so we are tying up. It is a 70:30 JV.

 

Does mean that you are not looking at expanding your land bank in Malaysia or Indonesia?

If they (FELDA) take back the LLA land, then we will have some money, maybe RM4 billion to RM5 billion, so at that point, I could be interested in buying a plantation. Even though it might be small, it is okay, because United Plantations, which is deemed one of the best plantation companies in Malaysia, only has 48,000ha. We are 10 times their size. You don’t have to be big, but you have to be good.

 

Your short-term debt commitments are about RM3 billion? Is that an issue?

We are using our cash for something that is long term, so it doesn’t match, because when you replant, profits will only come in 25 years, but we are using our cash today. What we need to do is match a long-term loan to go with that 25-year replanting. In the past, the decision was not very good; that is why they depleted from the RM4 billion that they had after the IPO. We are now about RM1.6 billion in terms of cash balance.

 

Are analysts’ (negative) recommendations on FGV justified?

This is my personal view. I think it (FGV’s stock price) will never reach the IPO price of RM4.55 because conditions then were different. If you look at NTA (net tangible assets), it should be trading much higher.

But if I can blow my own trumpet — before I joined, the share price was around 63 sen to 68 sen, at the end of 2019. After one year, the share price almost breached RM1.60, so more than 100%.

 

What is your fair value for FGV?

I think it should be around RM2.

 

Is Koperasi Permodalan Felda (KPF) involved in anything?

KPF still has shares in 10 companies with FGV, and they are considered minority shareholders. Before we declare our Patami (profit after tax and minority interests), they will take their profit. So not only do we have to minus the LLA before Patami, minority interest will take their profit first. And KPF has between 28% and 49% in the 10 most profitable companies in FGV group.

That is why we told FELDA the other day that they have three bites from the pie — one is from the LLA, regardless of CPO prices they get a fixed RM248 million; two, KPF gets a pick of the pie before ­Patami level; three, if we pay dividends, they get dividends.

This LLA is a good deal for FELDA and the settlers. One, we will buy “peneroka” fruits regardless of their location and pay them good pricing following MPOB (Malaysian Palm Oil Board) guidelines. We don’t squeeze people because they are located in remote areas. For FELDA as an agency, the “peneroka” community, for the KPF, they are getting a good deal from this LLA arrangement, so if they change the LLA arrangement, they have to fend for themselves.

 

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