According to FGV, Felda board will not support any proposal which will result in the dilution of its shareholding in the former

by SHAHEERA AZNAM SHAH / pic by MUHD AMIN NAHARUL

THE Federal Land Development Authority (Felda) has expressed its interest to remain the single-largest shareholder in FGV Holdings Bhd amid interest from Perspective Lane (M) Sdn Bhd (PLSB) to take control of the company.

In a filing to Bursa Malaysia yesterday, FGV stated that it received a letter from Felda chairman Datuk Seri Idris Jusoh on Oct 21, 2020, informing the Felda board will not support any proposal which will result in the dilution of its shareholding in FGV.

PLSB, in a letter dated Oct 12, 2020, expressed interest to inject its oil palm plantation business into FGV and become FGV’s largest shareholder.

The move comes amid heightened speculation to take FGV private as part of plans to restructure Felda’s billion-ringgit debt. Felda is FGV’s largest shareholder now with a 33.66% stake.

FGV also stated that it has not yet received a written notice from Felda on the termination of the land lease agreement (LLA) and its intention to take over FGV’s palm oil mills nationwide as announced by Felda special task force chairman Tan Sri Abdul Wahid Omar on Oct 30.

FGV also stated that PLSB has not yet mentioned whether the plantation assets it intends to inject into FGV are parked under Tradewinds Plantations Bhd and whether Central Sugar Refinery Sdn Bhd, which is parked under PLSB, is part of the assets to be injected into FGV.

The announcement comes after the Cabinet agreed to the proposed issuance of a RM9.9 billion government-backed sukuk as part of Felda’s recovery plan.

CGS-CIMB Securities Sdn Bhd said privatising FGV may be a cheaper option for Felda if the cost of terminating the LLA is too high. Based on FGV’s current market value, the cost of taking over the 66.4% stake that Felda does not own will cost about RM2.6 billion at current prices.

“We believe Felda may unlikely pursue the termination if the compensation is as high as RM3.5 billion to RM4 billion, given that it may be cheaper to take FGV private at current market valuation,” CGS-CIMB stated in a recent research note.

While discussions on the LLA termination have yet to commence, FGV estimates the compensation amount to be between RM3.5 billion and RM4.3 billion, based on the internal assessment of its financial performance for 2020 and 2021. CGS-CIMB stated that the constituents in calculating the compensation would be the determining factor of the termination as FGV did not clearly indicate which audited financial statement is used for the estimation.

“The compensation terms did not state whether the latest audited financial statement to be used in the compensation calculation is to be determined when the notice is served or 18 months after the termination notice is served as indicated by FGV.

“This could significantly sway the calculation on the potential compensation sum as our analysis showed that using 2019’s accounts will lead to very low compensation value.

“Any compensation value based on 2020 and 2021’s accounts will be debatable at this juncture as they would be premised on forecast profit figures,” it said.

According to the historical trends of the LLA payments and the prices of crude palm oil (CPO), CGS-CIMB said the compensation amount expected by FGV is unrealistically high.

“We are of the view that the amount FGV expects is optimistic, given the historical trends of LLA payments and our current understanding of the compensation formula. The final amount will be dependent on the performances of FGV’s estates and CPO prices,” the securities broker added.

In 2019, the average CPO price for FGV was relatively low at RM2,021 per tonne against the more favourable average price of RM2,545 per tonne recorded in the first nine months of 2020.

MIDF Amanah Investment Bank Bhd (MIDF Research) believed the impact of the termination on FGV’s fresh fruit bunches (FFB) supply would be moderate, although the planter’s landbank is expected to shrink by about 80%.

“Should the LLA be terminated, we expect FGV’s total landbank to shrink by about 80% to about 89,000ha based on the removal of 350,700ha leased land from FGV’s current total landbank of 439,700ha, most of which are oil palm-planted areas,” it said.

At present, FGV procures about 30% of its FFB supplies from the LLA land, 46% from Felda-managed smallholders and 24% from third parties.

MIDF Research also opined the termination could reduce FGV’s cost structure and help stabilise its earnings.

FGV incurs annual operating costs of about RM1.5 billion for the maintenance and upkeep costs such as replanting, fertilising, staffs’ quarters and plantation workers’ wages mostly on LLA plots, it stated.