By A. Stephanie
Over the past two years, Felda Global Ventures Holdings Bhd’s (FGV’s) lacklustre Bursa Malaysia performance has drawn even more scrutiny than its listing ever did. Last week, its top management blamed its share volatility on that of crude palm oil prices (CPO). KiniBiz looks at how much of this claim is true.
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Since listing at RM5.30 on June 28, 2012, FGV’s share price has been on a clear downward trend. The last time FGV’s stock hit stayed above RM5.00 was on Sept 3 of that year.
Malaysian Palm Oil Council’s (MPOC’s) recorded average CPO prices for June 2012 at RM2,956 per metric tonne (MT).
In September, the average dropped RM200 to RM2,720, and ended the year at RM2,052 in December 2012, a 31% slump from CPO prices at the time of FGV’s listing.
However, the CPO price monthly average picked up again in January 2013 at RM2,221 per MT, hovering thereabouts throughout 2013, spiking towards the end with RM2,576 per MT in November and December 2013.
The highest share price FGV recorded in January 2013 was RM4.61, but though CPO prices rose 14% to RM2,576 in December 2013, FGV’s stock had plateaued, posting the month’s high of RM4.62.
Does FGV’s stock really follow the seesaw movements of global CPO prices?
Crude palm oil’s high in 2014 was in March at RM2,862 per MT, rising steadily from its end-2013 figures. FGV share price ended March 2014 with only a slight rise to RM4.70, nowhere near its September 2013 high of RM5.00.
You can guess the rest of the story.
In early September 2014, FGV was down to RM3.86, and by mid-October 2014 it had plummeted to RM3.00. September’s average CPO price was RM2,059 per MT and October’s RM2,179 per MT.
Though it rallied back up to RM3.48 by end-October, FGV’s stock went below RM3.00 in December (RM2.99 on Dec 5, 2014) when CPO prices RM2,155 per MT and never looked back.
Now though CPO prices have gone up slightly, hovering between RM2,250 and RM2,300 for the past two months, while FGV hit its all time low of RM2.02 in January.
Though the stock recovered to RM2.94 in late February, it dropped again when the group announced annual profits drop of 47% on Feb 25.
While average CPO prices recorded by the council are local Peninsular Malaysia prices, FGV has plantations across Sabah and Sarawak as well, and group wide, it noted a higher 2014 average of RM2,410 per MT compared to 2013’s average of RM2,333 per MT.
Price fluctuations nothing new
Why then, didn’t its stock price perform better in 2014?
While the plantations sector is indeed a rocky one rather beholden to fluctuating CPO prices, this new dip is nothing new to experienced planters.
FGV was incorporated in 2007 as the commercial arm of Felda – it would have remembered all too clearly when CPO prices dropped below RM1,600 in November 2008.
As the world’s third largest oil palm plantation operator by hectarage, and the largest CPO producer globally, FGV of all companies should know better than to blame its share performance on commodity fluctuations.
A simple comparison to its sector peers on Bursa Malaysia shows that FGV’s volatility – marked by its beta coefficient of 1.2 or 20% more volatile than the market – is matched only by mid cap planter Ta Ann.
If indeed the performance of plantation share prices move in tandem with CPO prices, why then does pure planter United Plantations, as well as FGV’s large cap peers KLK, IOI and Sime Darby all note lower beta coefficients?
Emir said FGV’s share price moves relatively closely to that of CPO as it is solely a plantation company.
Knowing that CPO fluctuations could have direct impact on earnings, and thus share performance, it is the CPO yield and cost reduction that have distinguished planters – and even more so now that analysts and industry expect prices to continue to weaken in 2015.
Why is FGV hit extra hard by it?
Thinner profit margins
While FGV has resisted being compared to diversified conglomerates due to its peers dabbling in other sectors such as property, a simple comparison of how much plantation companies spend to process fresh fruit bunches (FFB) into CPO should stack them up side by side.
In simple terms, putting aside whether they are competing against diversified planters or pure millers, FGV’s profits are far thinner on CPO production due to its massive CPO production costs per metric tonne compared to industry averages.
Many planters divulge their ex-mill (cost at the mill, not inclusive of transport, amortisation, depreciation and taxes) cost of producing CPO, as with the introduction of minimum wage in both Malaysia and Indonesia, cost-cutting measures and mechanisation has become key to higher profits.
Though FGV has been rather proud of finally bringing their ex-mill CPO cost down below RM1,400 per MT in 2014, it is still spending far above its competitors to produce the same tonne of CPO – to be sold for around the same price.
An interesting note, however, is the all-in production costs for a tonne of CPO. While large cap planters average production costs of RM1,400 to RM1,600 per MT, FGV’s is worryingly high at RM2,067 despite dropping 14% from the previous year.
Following the announcement of its 2014 fourth quarter financial results, Maybank Kim Eng’s research report noted that FGV’s plantation cost structure remains high at an estimated FY14 all-in cost of production of MYR2,067 per MT.
In addition to the extra RM200-RM300 per MT of CPO produced incurred for transport, amortisation, et al that makes most big planters average RM1,400 to RM1,600 all-in, FGV has to also account for replanting costs.
In order to achieve its younger palm age profile of 12 years by 2019, FGV’s replanting efforts at 15,000 hectares annually is an estimated three to four times above the industry average.
According to a Kenanga Research note on Feb 23, 2015, this programme is expected to cost FGV an RM250 million to RM270 million annually.
On top of that, its hefty land lease agreement (LLA) payments are also predicated on CPO production, which analysts estimate at RM300 per tonne of CPO.
Thus, FGV’s earnings are even more sensitive to CPO prices than other planters. It is conundrum few would want to be in.
“FGV is a relatively new planter, coming in with old lands. They are the least efficient of the big planters, which is why they are embarking on this expensive yet necessary replanting plan.
“It would have been easier for them to replant if CPO prices were higher.The weakening CPO prices however are tightening their margins even more than other planters,” an analyst with a local research house told KiniBiz.
In simple terms, per tonne of CPO produced, at the current price of RM2,253 on the Bursa’s crude palm oil futures index (FCPO), assuming FGV continues to keep costs at RM2,000 per tonne or lower, the company profits a mere RM200 for every tonne of CPO produced.
What next for CPO?
On March 10, MPOC announced that Malaysian CPO inventories were at a 7-month low of 1.74 million tonnes as of end-February.
Nevertheless, this was above consensus, as exports to all countries except India dropped, and biodiesel demand remained weak. The increased stock is expected to drive CPO prices down further, but further where is anybody’s guess.
While analysts and industry experts alike expect prices to continue to weaken, CPO price forecasts have varied from RM1,500 per MT to RM2,800 per MT for the rest of 2015.
The recently concluded Palm and Lauric Oils Conference – Price Outlook (POC) 2015 organised by Bursa did nothing to narrow these margins, as can be shown below:
In its report following the Malaysian Palm Oil Board’s (MPOB’s) February inventory announcement, CIMB Research noted, “We think the factors that will come into play in determining CPO prices in the coming months will be the El Nino impact on global weather, strength of the recovery in palm oil supply, Indonesia domestic biodiesel consumption, and crude oil price.”
As none of these factors are entirely under FGV or any other planter’s control, it is up to FGV to widen its profit margins by making its processes more efficient, and consolidating the various acquisitions it has made in the last two years.
Cost-wise, FGV unfortunately cannot stay its replanting hand as it is already lagging behind other planters, as half of its palm trees are past their prime, aged over 20 years old.
What FGV can do, and is trying to do now, is negotiate the terms of its LLA payments to Felda to be more stable.
Going into its listing, analysts noted that investors would only see earnings spill in in 2018 and beyond. Though FGV has tried to improve its age profile and yield by acquiring revenue-generating land banks in Malaysia and Indonesia, the palms here too won’t reach their fruit producing prime for another three years.
The wait is long for FGV to deliver, but for now, it must continue to cut it’s ex-mill costs even lower so as to mitigate the effects of its additional CPO production costs.
Yesterday: Wither FGV’s buying spree?
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