Cover Story: Mammoth task ahead for FGV

TheEdge Thu, Apr 12, 2018 03:00pm - 5 years View Original


AT a wedding last year, a short while after it was announced that Datuk Azhar Abdul Hamid would take over as chairman of Felda Global Ventures Holdings Bhd (FGV), a businessman was heard telling him: “I bought FGV shares when they announced your appointment as chairman ... I know you will turn things around.”

Indeed, a day after his appointment in September last year, FGV’s stock rose 4.27% to RM1.71 while 19 million shares changed hands.

Azhar’s appointment to FGV is understandable as the stakes are high at the beleaguered plantation company.

“When I came in, it was a very difficult time,” he tells The Edge in an interview together with FGV group president and CEO Datuk Zakaria Arshad.

The bad news had been piling up over a period of time.

In June last year, just three months before Azhar’s appointment, four senior officials were suspended and told to go on leave of absence pending an investigation into purported wrongdoing at subsidiary Delima Oil Products Sdn Bhd in its dealings with Afghanistan-based outfit Safitex Trading LLC. The four were Zakaria, chief financial officer Ahmad Tifli Mohd Talha, Delima Oil senior general manager Kamarzaman Abd Karim and FGV Trading Sdn Bhd CEO Ahmad Salman Omar.

Of the four, Zakaria was the last to be reinstated, coming back in October.

Before Azhar’s entry, questions had also been raised about FGV’s aggressive and, in some cases, expensive expansion, largely financed by the proceeds of RM4.5 billion from its initial public offering in mid-2012.

The expansion included the RM1.2 billion acquisition of Sabah-based Pontian United Plantations Bhd, the £120 million or RM628 million acquisition of Asian Plantations Ltd, 8,478ha of oil palm land in Sabah from Golden Land Bhd for RM655 million cash and the RM2.2 billion purchase of the remaining 51% stake in its associate company Felda Holdings Bhd.

Zakaria, who had been appointed in April 2016, almost immediately put all the proposed acquisitions on hold, calling off the talks to acquire a 55% stake in China-based edible oils producer Zhong Ling Nutril-Oil Holdings Ltd for RM976.25 million cash and a 37% stake in Indonesian plantation company PT Eagle High for US$680 million (RM2.8 billion) from Indonesian Tan Sri Peter Sondakh.

“When I came to this position, the first thing I mentioned was, there will be no M&A (mergers and acquisitions) because to me, there was a lot of things to do with our existing assets. So now, what we want to do is sweat the assets; we want to improve our yield … you can see from the numbers that we have been improving our yield,” says Zakaria.

 

Getting along, but mammoth task ahead

Commenting on their relationship, Azhar says, “As far as we are concerned, management and board, we are working well together. And if you ask me, I have got no issues with Datuk Zakaria. What we do is, the relationship that we have, we have our one-to-one; we basically don’t hold anything back. If I don’t like something, I tell him. And if he doesn’t like something, he tells me.”

Zakaria chips in, “By doing that, I think this openness creates a better environment for FGV. To me, it is a healthy way forward.”

In its financial year ended Dec 31, 2017 (FY2017), FGV chalked up a net profit of RM143.73 million on revenue of almost RM17 billion. In the previous corresponding period, net profit was a mere RM31.47 million on turnover of RM17.24 billion.

It is worth noting that in FY2017, there was a gain on disposal of a long-term investment amounting to RM73.13 million.

When compared with other plantation giants, FGV seems to fall short. No doubt, its 51% subsidiary MSM Holdings Malaysia Holdings Bhd, which suffered a net loss of RM32.57 million on sales of RM2.67 billion in FY2017, dragged its earnings down. Still, the disparity between FGV and its peers is wide.

In its notes accompanying its financials, FGV says “operationally, CPO (crude palm oil) production increased 12.3% to 2.99 million metric tons (mt) associated with the growth in FFB (fresh fruit bunch) production from 3.91 million mt in 2016 to 4.26 million mt in 2017. OER (oil extraction rate) was lower at 19.83% compared to 20.68% achieved in the previous year”.

FGV’s FFB yield of 15.42 tonnes per hectare last year was lower than the national average of 17.89 tonnes. Its OER was actually higher than the national average of 19.72% but generally, many plantation companies are more efficiently run than FGV.

“To put it simply, we have not made very good investments and we are now evaluating a lot of the past investments. And if we have to, we will just dispose of them if we don’t see a future in hanging on to some of them.

“We have some joint ventures as well that we may get out of … because they don’t actually give us any value,” Azhar says.

With a total land bank of 440,622ha in Malaysia and Indonesia, FGV produces around three million tonnes of CPO a year.

Zakaria points out that there have been some issues with the age profile of the palm trees in FGV’s plantations, leading to some aggressive replanting — the company has undertaken to replant about 15,000ha a year.

“And we will try to do more than 15,000ha wherever we can,” he says.

Age profile is a problem that FGV has been grappling with for some time now. Back when it was listed in 2012, almost 50% of its palm trees were 21 years old or more. The percentage is expected to fall to 33% this year and even further to 25% by 2020.

Also noteworthy is that the percentage of the young and prime age palm trees is likely to be 47% this year and 54% in 2020, in contrast to 30% in 2012.

Reports also say that on average, FGV’s palm trees will be 14 years old this year and 12.8 years in 2020, in contrast to 17.5 years when the company went public.

The better age profile should bolster FGV’s FFB yields from 14.5 tonnes per hectare in 2016 and an estimated 15.4 tonnes last year.

FGV is targeting an FFB production and yield of 4.85 million tonnes and 17.85 tonnes per hectare respectively this year, Zakaria says.

Azhar adds, “We are trying to get to 20 [tonnes per hectare for] FFB quickly and also 22% OER. The industry average is quite low; I think we are close to the industry average. But if you talk about best in class, FFB should be nothing less than 21 tonnes. So, we still have a long way to catch up.”

Can the duo achieve what they have set out to do?

 

Will they be given a free hand?

Azhar and Zakaria may have what it takes to turn things around at FGV but will they be given a free hand in running the company or will there be interference from the political bigwigs?

According to Azhar, he has not had any issues since he joined as chairman of FGV six months ago.

The Federal Land Development Authority (FELDA) is a 33.67% shareholder of the company while Koperasi Permodalan Felda Malaysia Bhd holds 5.2%. The other substantial shareholders are Kumpulan Wang Persaraan (Diperbadankan) with 7.82% equity interest, pilgrims fund Lembaga Tabung Haji (7.8%) and the Pahang government (5%).

It is worth noting that FGV’s market capitalisation was RM19.85 billion back in June 2012. Now, it is below RM6.1 billion, which means some RM13.75 billion of the company’s market capitalisation has been wiped out.

These paper losses have turned out to be a hot potato for the ruling Barisan Nasional coalition as Felda settlers form the majority of 54 parliamentary constituencies.

But Azhar says, “In its true sense, FGV exists as a non-political entity. It operates like any other public-listed company.”

In the meantime, how soon can the duo show results at FGV?

According to Azhar, there will be some positive sentiments by the end of this year or early next year. “I think people are still watching us and rightly so, because a lot of them still have that bitter taste in their mouth. So I think that over time, they will get over that bitterness and start to appreciate what we’re doing and judge us fairly.”

With the general election to be held before August this year, FGV and its 33.67% shareholder FELDA are bound to be closely watched, not only by its investors but also the politicians.

 

 

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