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Tuesday, December 27, 2016


The most important thing with regard to Felda’s proposed purchase of EHP shares is whether the investment will add value and bring positive returns to the company.
TK Chua, Free Malaysia Today
I think there are genuine concerns expressed by various quarters on Felda’s proposed purchase of a 37% stake in PT Eagle High Plantation (EHP) in Indonesia.
Would Felda get to control EHP after the purchase? If not, why buy EHP shares at a high premium, as high as 173% as reported, over its market price?
Felda argued that the market price of EHP shares was not a true reflection of the value of the company. It clarified that the share price was not “an accepted valuation method” when it came to buying a plantation company.
This is what I do not quite understand: If market price is below valuation, why not just buy from the market? As far as I know, Felda is not buying a controlling stake from the majority shareholder.
Why should buying a plantation company be any different from buying other businesses? We buy an asset for its income generating ability. I am sure the market price is able to reflect that to some extent. If not, we are basically assuming that the Jakarta Stock Exchange serves no purpose.
There is very little logic in arguing that the market price of EHP is not reflective of “true valuation” simply because the company is 70% controlled by its major shareholder. In fact, market price should work to its favour if the shares are tightly held.
Felda is adamant about buying EHP because it is a “good deal” according to the company. Now, if it is a good deal to the buyer, can we assume it is a poor deal to the seller? Naturally, many will ask why the seller is so willing to sell if it is a good buy to the buyer.
Okay fair enough, there are win-win situations that I must not discount.
However, I think it will be good to know whether there are other serious bidders for this stake in EHP besides Felda.
There are reasons why Felda must take cognisance of the concerns expressed by others in this deal. If Felda’s past investment ventures have been found wanting, it is natural for many to ask why the next one would be any different. More so, when the price agreed upon is 173% higher than the market price currently traded on the exchange.
To be fair, Felda quoted some recent transactions involving Indonesian oil palm companies, the prices of which were comparable with or even higher than its offer to EHP. To this, I must say that no two plantations are the same in terms of location, average age of trees, productivity, and future potential.
I think Felda should stop using arguments like the deal will not adversely affect the wellbeing of the settlers. The most important thing is whether the investment will add value and bring positive returns to the company. If not, the welfare of the settlers will be affected. If they are not, the taxpayers will be. I think Felda should start talking sense and stop talking nonsense.

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