By Aidila Razak
For this week’s issue, KiniBiz turns its attention to Felda Global Ventures (FGV), the world’s third largest oil palm producer, which controversially listed last year amidst allegations that settlers did not get their fair share of the cake. In the first of a four-part series, we take a look at FGV’s listing, the price movements post-listing and the problems it faces going forward.
In the six months after its much anticipated listing, government plantation flagship stock Felda Global Venture Holdings (FGV)’s performance on the market has resembled a roller-coaster ride.
Rallying to a high of RM5.55 in July 2012, the share spent most of 2013 below its initial public offering price of RM4.55, or hovering just above. And then in March, it quite suddenly shot up close to 20 sen to a three-month high of RM4.76. What gives?
For most parts, FGV’s sudden surge matches the rise in the plantation index, following clarity over the crude palm oil (CPO) price outlook.
Its lacklustre performance, too, has not been an isolated case. Plantations counters have all been hit by low global demand for CPO, which has driven stockpiles up and prices down.
But while this is partly true, FGV’s downward spiral began in July. This is three months before other plantation counters showed the effects of shrinking CPO demand in October.
The story of the FGV stock, analysts believe, is more political than anything else.
Analysts admit that this was behind much of their calls in the early days of the FGV listing. Listing a government flagship in the lead-up to elections means that stakes are higher for it to succeed.
“The buy call soon after the IPO was mainly because it is a very big and high profile listing. It was in everyone’s interest for it to go up,” Alliance Research vice president of equity research Arhnue Tan said.
And it did.
Quick profits
“But when it hit a certain point, investors started to take profit. These selling activities are very commonly seen in large IPO’s such as FGV’s as it is a chance for easy profits. Provided the IPO performs, of course.”
Ministry of International Trade and Industry or Miti-approved investors were allocated a cool 419 million shares—11.5 percent of the share capital.
Other institutional investors, like the Employees’ Provident Fund (EPF) were allocated 7.9 percent of shares while the general public were offered two percent via balloting. The remainder 5.5 percent were shared between Felda settlers and employees. Much of the FGV IPO did not filter down to the public or even Felda settlers.
“The allocations were fishy. Institutional shareholders only got allocated a small amount while individuals got more. So the individuals flipped it while the institutions chased (the price up),” a stockbroker said.
Even if only half of the Miti-allocated shares were sold at the peak price of RM5.55, investors would have stood to pocket RM 210 million. The identities of these investors, Miti said, are “confidential”.
The guessing game over the elections also does not bode well for FGV, which is seen as a “highly political stock”. Felda settlements are home to about 100,000 settler households, which are seen as a valuable vote bank and turned the FGV IPO into a political battle.
More so than other plantation stocks, the initial sell down, analysts believe, would have spooked most of the retail investors who would have likely already planned to let go of stocks with political baggage prior to elections. While it dipped below the IPO price in a few instances, the share price has mostly kept above water, pushing retail investors to sell before a loss.
Back to fundamentals
“But when it comes to stocks, whatever way you cut it, the fundamentals will eventually catch up. In the event that CPO price drops below RM2000 per tonne, there is no way FGV can stay above RM4.55,” the stockbroker observed.
Fundamentally, other analysts believe, the FGV story is really more humdrum than the politics may indicate.
“They have raised RM4.4 billion in the IPO exercise so there is room to grow there, and they have three years to spend most of that money.
“They haven’t yet, so it really depends now on their mergers and acquisition strategy. Besides that, there is not much happening to really push it up or down,” said an analyst from an investment bank with more than a decade of experience analysing plantations stocks.
One thing that has been sustaining the prices is the large institutional buys. EPF has purchased more than 46 million shares since August, taking a contrarian approach to the market and inviting criticism over millions of ringgit in paper losses.
The Federal Land Development Agency (Felda), through its subsidiary Felda Asset Holdings Corporation (FAHC) which collectively own 40 percent of FGV have been buying back the latter’s shares from the open market.
The analyst, however, observes that there is reason to believe that the stock is more valuable as a long hold. For starters, she said, the listing is an opportunity for the third largest oil palm operator in the world to change tracks from being a government-subsidiary to an entity which will be heavily scrutinised.
“This means they will have to improve on their efficiencies. This will take a longer time to do but it it will mean they will most likely be a better company from here onwards,” she said.
Good dividend payouts
Investors can also look forward to a dividend payout policy of 50 percent of net profit. CIMB Research in its report estimates that this could translate to 14 to 18 sen per share for the 2013/2014 financial year. In September, FGV paid out a dividend of 5.5 sen per share.
The long wait, however, is mostly for the trees, which it is in the process of replanting to grow and produce yield. It will take three to four years before the trees planted today can bear fruit and 70 percent of its trees are aging and mature. As a result, yields will be lower compared to its peers. Its fresh fruit bunch yield is an average of 19 metric tonne per hectare.
Analysts say it is on par with the Malaysian average but pales in comparison to that of its peers. Kuala Lumpur Kepong and Genting Plantations, for example, have a FFB yield average of 22 to 24 metric tonnes per hectare.
FGV’s outgoing chief executive officer Sabri Ahmad has reportedly said that the company intends to spend RM270 million a year to replant 15,000 ha of land to deal with this. It has also earmarked RM2.19 billion or about half of its IPO proceeds for acquisition of plantation assets.
“What happened with FGV is that they were slow to replant. Most companies have a replanting programme, which is executed regardless of CPO price fluctuations. This didn’t happen at Felda,” Alliance’s Tan said.
Others are also concerned about the value of its land bank—some 347,584 ha of land leased from Felda.
“The lands are third rate. Not the most fertile and usually in hilly areas, bordering jungles,” the broker said, saying these factors indicate that the IPO was “overpriced”.
Better quarters needed
The lease agreement, effective January 2012, is also cited by FGV’s outgoing CEO for weaker than expected performance in the third quarter of last year.
Sabri said this change in business model had in parts bore down on its results, which saw a drop in profits despite commendable growth in revenue. Other factors, he said, was the cost of replanting as well as fertilisers.
Sabri Ahmad
“It’s true, but he (Sabri) cannot put the blame on this. It’s FGV’s business model,” Tan said.
She said that the results were actually a combination of declining CPO prices, lower year-on-year production owing to weather and aging hectarage and slower than expected turnaround of their overseas assets.
The assets include soy and canola mills in the United States and Canada. RM260 million of the funds raised from the IPO was supposed to be used to pay its Canadian operations debts by January 2013.
“They’re still new so they don’t have a track record that investors can identify with. Furthermore, with the new company structure post-listing, data in the prospectus does not give one a clear idea of their earnings trends going forward.
“We view that for a turnaround, Felda will need a couple of quarters of good results to convince investors,” Tan said.
And with FGV posting a 39 percent drop in net profit for the year ended December 31, 2012 some investors may remain unconvinced. Others who can stomach steep slides, however, may jump on the roller-coaster for the climb.
FGV declined to be interviewed for this article.
Tomorrow: The Felda settler and the FGV listing
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