The worst is behind us, says FGV chairman

Azhar says the higher CPO price provides a welcome respite to the palm oil sector as a whole


FGV Holdings Bhd chairman Datuk Wira Azhar Abdul Hamid (picture) said in a seven-page letter to shareholders yesterday that the plantation group is on a stronger footing and set to make further progress with its restructuring.

FGV is “definitely on the right path towards a new and far better future”, he stated in the letter filed with the exchange, the third from Azhar as a status update on the company’s progress towards implementing its group-wide transformation plan.

The higher crude palm oil (CPO) price provides a welcome respite to the palm oil sector as a whole, Azhar said.

“While this is definitely a strong positive for FGV, the board intends to use this opportunity to build a more resilient FGV and to transform it into an organisation that is not wholly dependent on CPO price for its performance,” he said.

The group is in the process of repositioning itself as a major player in the agriculture and food industries.

While palm oil will remain a mainstay of its business, FGV will “deliberately and carefully redeploy appropriate resources” into higher value and synergistic sectors, to mitigate CPO price fluctuation risks.

The board intends to use the higher CPO price environment to build a more resilient FGV. (pic by BLOOMBERG)

“FGV will make sure this strategic diversification benefits all our stakeholders, especially the 112,635 smallholders whom we regard as our partners and with whom we have a symbiotic relationship,” Azhar added.

FGV buys two-thirds of its fresh fruit bunches from the Federal Land Development Authority (Felda) scheme smallholders and independent smallholders.

FGV’s move to get its estates back on track has not resulted in improvement in the group’s bottom line as CPO prices remained low for most of the year and its business transformation “continued to unearth legacy issues”.

As a result, the board was unable to reward its shareholders with dividends for the financial year ended Dec 31, 2018.

“This is a completely unsatisfactory state of affairs, one I am eager to rectify, even though we all knew this turnaround would take a considerable time and effort to reset the whole organisation.

“The transformation would involve far more than just a clean-up of questionable investments, which has not only cost us billions of ringgit, but is now taking up a considerable management time and attention as we plough through legal processes to protect the interests of our shareholders,” Azhar said.

The group has not declared a dividend since 2017. Its net loss narrowed to RM262.4 million in the third quarter ended Sept 30, 2019, from RM849.4 million a year ago.

Azhar also said there are still some lingering challenges with FGV’s subsidiary, MSM Malaysia Holdings Bhd, but plans are underway to address these issues.

FGV has a total landbank of 439,725ha, of which around 351,000ha is leased from Felda under a land lease agreement. FGV has been committed to paying Felda RM248 million a year for leasing the land.

“As a result, FGV needs to earn more from each acre than others — a cumulative RM248 million a year at least. And that is the target we have set for ourselves,” Azhar said.

To achieve this, the group’s board and management have fine-tuned a three-pronged strategy, which involves restoring its palm oil businesses, developing new earning streams from the circular economy, and identifying adjacencies to existing revenue streams to optimise returns.

The firm is eyeing an annual revenue of around RM200 million to RM300 million from its renewable energy division by further unlocking the value of waste produced as part of its daily milling processes.

For the circular economy, the aim for 2020 is to achieve 50,000 metric tonnes (MT) of feed production and to launch two new premium feed formulations for dairy cattle.

The group doubled its sales volume, revenue and sales margin of animal feed over the last 12 months, producing 21,652MT of animal feed and achieving a revenue of RM9.93 million and sales margin of RM61.76 per MT.

On plugging procurement leaks, the group secured procurement savings of between RM155 million and RM170 million as at November 2019, achieving its target of RM150 million in savings.

However, it had only disposed of RM129 million worth of non-core assets and underperforming joint ventures as at November 2019. The group’s target was RM350 million worth of disposals.

The group is in several ongoing discussions with regard to selling its noncore assets, Azhar said.

As at September 2019, FGV’s manpower numbers were reduced by 8.5% from 18,742 to 17,146. It aims to cut manpower cost by 10% annually for the next three years.

At the beginning of last year, the group’s manpower cost stood at RM1.2 billion per annum, of which 55% was for fixed pay and 45% for variable pay (overtime allowances, medical, travel, entertainment, etc).

FGV shares closed 2.65% or four sen lower at RM1.47 yesterday, valuing the company at RM5.36 billion.