A solution to FGV’s financial woes

by ALIFAH ZAINUDDIN / pic by MUHD AMIN NAHARUL

PERSPECTIVE Lane (M) Sdn Bhd’s (PLSB) proposal to inject 132,940ha of oil palm plantation land, refineries and downstream activities into FGV Holdings Bhd would create a palm oil producer larger than IOI Corp Bhd based on planted area.

If PLSB’s proposal of shareholding in FGV gets the nod, FGV’s plantation landbank size will increase to 212,170ha even if the company ends its eight-year land lease deal with the Federal Land Development Authority (Felda).

IOI has about 176,156ha of planted area, while industry mammoth Sime Darby Plantation Bhd (SDP) has 320,000ha.

According to sources, the proposal submitted to FGV’s board in return for a substantial shareholding in the ailing planter would see the return of some 360,000ha of leased land to Felda.

“With the additional land injection, it would increase FGV’s own planted land despite the return of the 360,000ha. There are also downstream activities that can help FGV.

“PLSB also owns Central Sugars Refinery Sdn Bhd (CSR) and Padiberas Nasional Bhd, apart from Tradewinds Plantation Bhd. All these businesses will create a synergy in FGV that can pull the latter out from its financial rut,” said an industry source who declined to be named.

It is believed the inclusion of PLSB’s sugar business will sweeten the deal as FGV tries to revive its loss-making 51% stake in MSM Malaysia Holdings Bhd. MSM posted a net loss after tax of RM299.77 million last year compared to a net profit of RM35.61 million in 2018.

A merger between rivals CSR and MSM would make the entity one of the largest sugar refiners in the world by capacity.

FGV’s toughest huddle is the 360,000ha land leased from Felda under a 99-year land lease agreement (LLA). The deal was intended to uplift the company’s valuation for its listing in 2012.

Under the agreement, FGV has to pay a fixed annual income of RM250 million plus 15% share of its profits. Felda is currently FGV’s largest shareholder with a 33.66% stake.

Without the LLA, FGV will be left with just 86,000ha of land, which will push the company down into a mid-sized planter category.

“With the proposal and new injection from PLSB, FGV will be in the same elite group of planters like SDP and IOI, and give them a steady revenue stream,” said the source.

Another source said CSR would be a good inclusion if injected into FGV.

The transfer of land back to Felda would also come with a guarantee from FGV to buy yields from the state-owned plantation agency.

Some settlers have opted to sell a portion of their yields to other companies that offer faster payments.

Under the deal, FGV can continue to play as a strategic partner to Felda for settlers to sell their fresh fruit bunches (FFB) to FGV mills, especially those mills are located near their land parcels. FGV may continue to be their estate management agent with favourable terms.

Settlers can also sign an agreement with FGV for the latter to continue to manage those estates with an agreed profit sharing or with a minimum payment if the FFB price falls below a certain target price.

The move comes amid attempts by the government to revive loss-making Felda. The state agency needs about RM800 million per year, but is receiving half the amount on average as FGV fails to deliver substantial profits.

FGV posted just two quarterly profits in the last nine quarters.

In 2018, it reported a record annual loss of RM1.08 billion attributed to massive impairments and lower average palm oil prices. The poor showing led to its failure in delivering dividends for the first time.

Prior to the LLA, Felda’s net income stood as high as RM1.1 billion, while revenue went up to RM5.9 billion from 2007 until 2011.

Felda has not recorded a single profit since FGV went public in 2012. Its net loss widened up to RM5.7 billion in 2018, while turnover remains under RM2 billion.

FGV’s move to return the land it leases from Felda could pave the way to resolve some of the latter’s financial issues, potentially by selling off some assets and repurposing the land with alternative crops that could help settlers pay their debts and increase their yields.