Thursday, September 3, 2015


The continuing slump in crude palm oil prices has made a dent in Felda profits over the past year. While the group is now trying to tie up a major deal – the acquisition of a 37% stake in PT Eagle High Plantations Tbk – its purchases over the past two years have so far failed to contribute significantly to its bottom line.

FGV has spent close to rm5 billion since 2013 in an effort to increase its landbank in order to rectify its ageing tree profile.

Despite to secure new parcels to boost its crop production as well as replenish its crops via a replanting exercise, its overall output has remained depressed over the past two years.

Acquiring the strategic stake in Eagle High is essential to FGV’s business aspirations. The deal would enable it to make significantly inroads into the vast Indonesian palm oil market while giving it some 400000ha of Greenfield landbank to work with. Over the next few years from Aug 2015, the group is hoping to lower the overall age profile of its palm tree to 8% years old from 15 years oil presently (Aug 2015).

However the weakening ringgit is proving to be a major inconvenience for FGV in its latest acquisition. This means that FGV’s purchase price has ballooned significantly as it is paying for the company using its ringgit denominated cash reserves.

Investors perceived the price as expensive back in June 2015. Now (Aug 2015) with the ringgit and CPO prices getting weaker, it has become an even pricier purchase.

In fact the sizeable sum may have been the reason why FGV could not transfer a USD174.5 million refundable deposit to Eagle High earlier, resulting in the higher acquisition cost for the group due to the ringgit’s sharp decline in Aug 2015.

It is believed that the deal should be repriced to reflect valuations.

Eagle Highs entire market cap of USD540 million is less than the USD745 million that FGV is paying for a 37% stake. If it goes ahead and pays the amount, there may be a substantial write down in the value of the asset in the future.

Assuming that a significant portion of consideration for the Eagle High transaction is taken from its existing cash pile of RM2.2 billion, it will need further capital in order to continue its capex drive for replanting its landbank.

Due to the worsening fundamentals of palm oil as well as the ongoing turmoil in the equities market FGV is facing an uncertain few months ahead (Aug 2015 onwards). It has to ramp up its monetization exercise in order to balance its books, especially if it intends to wrap up the Eagle High acquisition by end 2015.

On Aug 27 2015, the group announced the disposal of its Canadian downstream assets for rm608 million. The sale of the subsidiary will boost its cash pile as well as its downstream operations, which had been dragged down by the subsidiary losses.

Some say FGV’s falling profits and depleting cash pile will impede its ability to pay dividends. Historically the group has given away more than 60% of its annual net profits as dividends.

It was reported that FGV;s net tangible assets per share of rm1.33 could dip further due to the potential dilution arising from the Eagle High deal, which could affect its cash reserves and operational cash flow.

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