At our recent Invest Malaysia-Hong Kong conference, Felda Global Ventures (FGV) met up with 12 fund managers. The group has plenty of M&A plans, ranging from bringing Felda Holdings under its wings to expansion in ASEAN and Africa. In its future ventures to the African continent, the company is looking to replicate the FELDA model at its Malaysian operations. FFB production is likely to be soft over the next few years as its trees age and its replanting programme is rolled out, but the group may start on a steady upward trajectory in 2015. Our fair value for FGV stands at RM4.75.
Gaining downstream control. FGV has huge plans to utilize its IPO proceeds, earmarking it for upstream and downstream acquisitions and construction totaling RM3.8bn. First on its agenda is to consolidate 49%-owned associate Felda Holdings (FHB) under its wings over the next 12 months. Although this does not necessarily mean a total buyout of Koperasi Permodalan Felda (KPF)’s entire 51% stake, FGV is looking to get hold of a sizeable stake from KPF in order to gain firm control on the mid- and down-stream focused FHB. This could be executed either through a share swap (ie KPF sells its FHB stake in return for FGV shares) or by cash. FGV currently sells its fresh fruit bunches (FFBs) to FHB for milling into crude palm oil (CPO) before repurchasing the CPO and reselling them to FHB’s refineries for further value-adding. Indeed, this business structure can be simpler than what it currently is.
Extending its reach. In relation to its upstream expansion, the planter is currently in talks to purchase land adjacent to its Kalimantan 42k ha JV land with Lembaga Tabung Haji. It is also on the lookout to buy private Malaysian companies with 2k-3k ha of planted areas that are already supplying FFBs to FHB’s mills. Management has ambitions to also extend beyond the borders of Malaysia and Indonesia, with Cambodia, Myanmar, Vietnam and the continent of Africa in mind. While expansion is good, whether the acquisitions will add value to the group will depend on: i) the price that FGV will be paying, ii) a thorough study on the suitability of these areas for planting, and iii) the company’s familiarity in doing business in those countries.
Saying ‘hello’ to Africa. FGV aims to make a foray into the African continent by replicating the FELDA model currently practised in Malaysia. African settlers will be provided World Bank loans to buy land, seedling, fertilizer and machinery. Meanwhile, FGV will focus on the downstream side of value chain by constructing and operating palm oil mills and refineries in the region. The quality of FFBs arriving at its mills can possibly be an issue initially due to the region’s relatively poor infrastructure and little oil palm planting experience among the settlers.
Gaining downstream control. FGV has huge plans to utilize its IPO proceeds, earmarking it for upstream and downstream acquisitions and construction totaling RM3.8bn. First on its agenda is to consolidate 49%-owned associate Felda Holdings (FHB) under its wings over the next 12 months. Although this does not necessarily mean a total buyout of Koperasi Permodalan Felda (KPF)’s entire 51% stake, FGV is looking to get hold of a sizeable stake from KPF in order to gain firm control on the mid- and down-stream focused FHB. This could be executed either through a share swap (ie KPF sells its FHB stake in return for FGV shares) or by cash. FGV currently sells its fresh fruit bunches (FFBs) to FHB for milling into crude palm oil (CPO) before repurchasing the CPO and reselling them to FHB’s refineries for further value-adding. Indeed, this business structure can be simpler than what it currently is.
Extending its reach. In relation to its upstream expansion, the planter is currently in talks to purchase land adjacent to its Kalimantan 42k ha JV land with Lembaga Tabung Haji. It is also on the lookout to buy private Malaysian companies with 2k-3k ha of planted areas that are already supplying FFBs to FHB’s mills. Management has ambitions to also extend beyond the borders of Malaysia and Indonesia, with Cambodia, Myanmar, Vietnam and the continent of Africa in mind. While expansion is good, whether the acquisitions will add value to the group will depend on: i) the price that FGV will be paying, ii) a thorough study on the suitability of these areas for planting, and iii) the company’s familiarity in doing business in those countries.
Saying ‘hello’ to Africa. FGV aims to make a foray into the African continent by replicating the FELDA model currently practised in Malaysia. African settlers will be provided World Bank loans to buy land, seedling, fertilizer and machinery. Meanwhile, FGV will focus on the downstream side of value chain by constructing and operating palm oil mills and refineries in the region. The quality of FFBs arriving at its mills can possibly be an issue initially due to the region’s relatively poor infrastructure and little oil palm planting experience among the settlers.
Flooding concerns. FGV’s 9MFY12 FFB production fell 9.7% y-o-y amid poor output across the country. The company’s old trees and ongoing replanting programme would have also contributed to the y-o-y decline. Estates in parts of Johor (including FGV’s) are experiencing some flooding as a result of recent heavy rainfall, which made harvesting difficult. The company expects the floods to worsen in the near term before improving, forecasting for full-year production to be 7.0% short of 2011’s. We expect production to decline by 8.9% this year before perking up by 1.5% next year.
A more productive breed. FGV has been using its Yamgambi seedlings in its replanting initiative since 2002. The seedling is touted to produce peak FFB yields of 38 tonnes per ha and peak oil extraction rates (OER) of 28%. Tree stands have also been increased to more than 136 trees per ha at its replanted slots from 110 trees prior to replanting. This will lift FFB yields moving forward. FGV’s research subsidiary is self-sustaining as seedling sales and sales of FFB harvested from its 12k ha research plot are more than sufficient to cover its research costs. The unit reported profits of more than RM90m in 2011.
RM4.75 FV. We value FGV at a FV of RM4.75, based on 16.5x FY13 plantation earnings and 13.5x FY13 sugar profits. Our expectations are for FY12 earnings to decline by 25.3% before rebounding by 37.0% in FY13 on the back of a production recovery and firmer prices. As FGV’s replanting programme essentially replaces old, fruit-producing trees with immature, non-producing trees, its FFB production should go on a downtrend over the next few years. We believe that production will nonetheless turn the corner in 2015 and begin to experience positive, albeit marginal, growth of between 0.7% and 3.0% from 2015-2018 before further strengthening from 2019 onwards.
A more productive breed. FGV has been using its Yamgambi seedlings in its replanting initiative since 2002. The seedling is touted to produce peak FFB yields of 38 tonnes per ha and peak oil extraction rates (OER) of 28%. Tree stands have also been increased to more than 136 trees per ha at its replanted slots from 110 trees prior to replanting. This will lift FFB yields moving forward. FGV’s research subsidiary is self-sustaining as seedling sales and sales of FFB harvested from its 12k ha research plot are more than sufficient to cover its research costs. The unit reported profits of more than RM90m in 2011.
RM4.75 FV. We value FGV at a FV of RM4.75, based on 16.5x FY13 plantation earnings and 13.5x FY13 sugar profits. Our expectations are for FY12 earnings to decline by 25.3% before rebounding by 37.0% in FY13 on the back of a production recovery and firmer prices. As FGV’s replanting programme essentially replaces old, fruit-producing trees with immature, non-producing trees, its FFB production should go on a downtrend over the next few years. We believe that production will nonetheless turn the corner in 2015 and begin to experience positive, albeit marginal, growth of between 0.7% and 3.0% from 2015-2018 before further strengthening from 2019 onwards.
Source: OSK
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