ALL EYES on Felda share debut: How much will Najib spend to keep price propped up?

UPDATE 2 As expected, shares of Felda Global Ventures Holdings Bhd surged on its controversial listing debut on Thursday, jumping as much as 20% over its IPO price of RM4.55 - raising eyebrows as to the extent Prime Minister Najib was willing to spend to ensure a 'face-saving' success.

"Everyone knows this is a cannot-fail for Najib. The wolves are all here sharpening their knives and the next question - for long will Najib keep the price propped up and if he will announce any goodies that will make Felda investors delay cashing out. It can be a few weeks to a few months but certainly, our view is that the share is over-priced and the only direction now is likely to be down," a director at a bank-backed brokerage toldMalaysia Chronicle.

"No matter how many GLCs have been ordered to buy the share, eventually market forces will prevail. Even the GLCs and agencies like Khazanah have to be marked to market and revalued. If Felda cannot produce the profit it has promised to, what justification is there to keep the stock and not invest in other firms that are making more money. If the GLCs and government agencies do so, it would only be at Najib's request or I guess this would be the famous 'national service'."

Market wolves smell blood

Indeed, straight from the opening bell, Felda shares rallied hitting RM5.46 within the first 14 minutes of trading on the Main Board of Bursa Malaysia on Thursday.

For Prime Minister Najib Razak and his Umno party, the listing marks an important milestone - not only for the settlers but also for the nation. For the Opposition and other critics, this is daylight robbery and will spell disaster - not only for the settlers but also for the nation.

Whoever is right, time will tell. But for today, there is little doubt that Najib will ensure a successful debut. As political pundits have said, if despite all his efforts, the Felda shares score a dismal listing, then Najib & Co had better go home and pack their bags straight away for 'retribution' from angry settlers - who have always formed a core base of Umno's electorate - will know no bounds!

Felda was established 56 years ago as a social engineering scheme to uplift the lives of the Malay rural poor. It is state-owned and has been placed directly under Najib's purview in the Prime Minister's Department. It is listing its commercial unit Felda Global Ventures or FGV.

Meanwhile, according to Bloomberg, with the positive Felda listing Malaysia has bucked the global downtrend of a stocks sell-off brought on by the European debt crisis, which has seen at least US$12.3 billion of first-time sales scrapped or delayed globally since the start of this year.

The food business is quite resilient to recession,” said Sabri Ahmad, CEO of FGV. “As long as China and India keep on buying oils and fats, the demand is there. The debt crisis shouldn’t have a big impact.”

Taking advantage of Najib's 'generosity' and need to prop up price

Most of the local research firm had given a rosy forecast for the IPO. However, the Wall Street Journal did not share the same view and had bluntly forecast that investors would not hold the shares for long. Investors may snap up the stock to take advantage of Najib's window-dressing efforts and then sell to make a tidy profit but after that, it would be 'Adios'.

It is widely known that Najib and his Umno party are banking on a successful IPO to keep the Pakatan Rakyat led by Opposition Leader Anwar Ibrahim at bay, with the country's 13th general election due to be called latest by mid 2013.

WSJ also noted that the state-run commodities firm has raised US$3.1 billion (RM9.3 billion) in sales for stocks of its initial public offering (IPO) ahead of its debut, although it posted a 50 per cent drop in this year’s first quarter profit yesterday due to higher costs in planting palm oil trees.

“The profit slip is in contrast to the IPO prospectus, which promoted the group’s expertise as the world’s third-largest palm-oil plantation operator,” WSJ said in an article entitled “Felda Plants Seeds of Investor Discontent” published earlier this week.

The well-regarded international business newspaper highlighted that Felda’s first quarter income has barely budged, growing only 1.8 per cent from last year. The paper noted that Felda had given flimsy reasons for posting such poor growth, saying it had to pay a higher-than-expected price for crude palm oil.

“There can be few excuses for such poor foresight. A plantation company should know the cost of planting new trees,” the paper said.

Fairvalue of RM5.65 or 24% upside to IPO price of RM4.55

However, M&A Securities had a different opinion on the Felda IPO. It had called a "buy" on the share and predicted an upside of 24 per cent to the plantation company's IPO price of RM4.55.

In its research note, the firm is giving the shares of FGV - the commercial arm of Felda that is being listed - a fair value at RM5.65 which translates into a price earnings multiple of 12.2 times, which is "still relatively low compared to its peers".

"Going forward, there will be acquisitions of additional plantation landbank where it is available and economically attractive," M&A said.

M&A Securities noted that half or RM2.2 billion of the IPO proceeds will be used to increase the company's landbank size in the Asean and Africa region. With a plantation landbank size in the top three, just behind Sime Darby Bhd and Golden Agri Resources Ltd, the research firm believes FGV will be able to maintain its market with potential to increase its landbank with more acquisitions coming and commencement of new palm oil mills.

Indeed, FGV is one of the world's largest millers of fresh fruit bunches (FFB) with 70 mills located throughout Malaysia. With 355,864ha of plantation estates, it has operated 343,521ha of oil palm estates in Malaysia that produced 5.2 million tonnes of FFB in 2011.
Its 49 per cent-owned associate Felda Holdings Bhd, meanwhile, is the largest producer of crude palm oil (CPO) in the world, based on production volume, having produced 3.3 million tonnes of CPO last year.

Proud day or Black Thursday?

FGV's Sabri also hailed the share debut as proud day for all settlers and Malaysians. He pointed out that 112,635 Felda settlers will see FGV ranked as the third-largest listed palm oil operator globally, in terms of landbank.

"These settlers deserve to see this success. "Through their toil and sacrifices, opening up jungles for cultivation since the 1950s, they have helped to develop the RM80 billion palm oil industry that we see today, which are mostly locally owned," said Sabri.

"In fact, the RM15,000 windfall that was given to settlers, their wives and family members was from part of the listing proceeds. None of it was money from the national Treasury."

However, Wong Chen, who heads the Parti Keadilan Rakyat's Investment Bureau, warns that settlers stood to lose EM100mil in welfare support. He also questioned why the government - the controlling stakeholder of Felda - had only distributed a RM15,000 windfall to the settlers when they were entitled to at least RM50,000.

"First we had the small unfair windfall, then the unfair allocation of shares to favour rich bumiputera, now settlers are again unfairly treated by a RM100 million reduction in welfare support," said Wong.

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