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Saturday, April 29, 2017

ANOTHER ‘I PASS TO YOU, YOU PASS TO ME’ DEAL TO BENEFIT NAJIB CRONIES? FELDA TO UNRAVEL FGV DEAL, TAKE BACK LAND TO RE-LEASE TO NEW PARTY?

A MAJOR reshuffle is on the cards for the Federal Land Development Authority (Felda) and its plantation arm, Felda Global Ventures Holdings Bhd (FGV), that could see the emergence of a new shareholder in the latter.
Felda is said to be seeking the return of the land that is currently leased out to and managed by FGV because it feels that it can extract higher returns.
At the same time, FGV is also likely to see a new shareholder emerging.
According to sources, the party is said to be an investment vehicle led by Wilmar International Ltd co-founder Martua Sitorus.
“The strategic partner may either simply acquire the shares or inject plantation assets into FGV or both.
“The latter option would suit FGV since it will need a new plantation landbank to work on for its upstream operations should Felda take back its land,” says a source familiar with the negotiations.
Recently, Felda chairman Tan Sri Shahrir Abdul Samad stated that it needed to boost its revenue base and income source, as it requires at least RM2bil to RM3bil annually to carry out its programmes for settlers.
Shahrir also said that it was not happy with the returns from the land being managed by FGV.
New developments planned by the agency include an ambitious affordable housing scheme for settlers, as well as for the construction of new staff quarters. The housing scheme to provide 20,000 units is estimated to cost it some RM500mil a year.
About 335,000 ha from Felda’s total landbank of 850,000 ha are currently run by FGV under a land lease agreement (LLA) which was established in 2012.
If the plantations are transferred back to Felda, it would mean that the LLA between the two parties will come to an end.
On the other hand, FGV had in the past repeatedly expressed its desire to renegotiate the terms of the LLA. The cost associated with the agreement is a huge crutch on FGV since it distorts the group’s efficiency metrics as well as its net income margins (see sidebar).
New ideas
Felda has been exploring new ideas to squeeze more out of its investment assets and maximise its investment in FGV. This proposal is a more cost-effective way to retake FGV’s landbank as opposed to an outright privatisation exercise, which would cost billions of ringgit.
In a recent interview with StarBiz, Shahrir expressed concern over FGV’s slow progress in achieving greater efficiency. He mentioned that bringing the landbank back into Felda was one way of expediting this as part of his “balik asal” (back to the roots) philosophy.
In a related development, it is believed that Felda could also explore reducing its stake in FGV that currently stands at about 33%. In this respect, one name that has emerged as a possible buyer is Sitorus.
Last month, Wilmar announced that Sitorus was stepping down as the group’s executive deputy chairman and would be redesignated as a non-independent non-executive director. Such a deal makes sense for both Felda and FGV. With a new landbank to operate on, FGV can compete on an even playing field with its peers, as it no longer has to pay the RM250mil fixed payment to its parent.
Out of Felda’s total landbank and excluding the 335,000ha held by FGV, another 475,000ha is appropriated to small land holders or Felda’s settlers, while Felda’s own managers operate the remaining 40,000ha of the plantation landbank.
If it is able to secure a brownfield plantation landbank to work on, FGV can also benefit from the lower average tree profile of its crops, as well as lower expenses from replanting efforts. The group will also retain its downstream operations, its trading and logistics business as well as its sugar business.
It is currently not known whether Felda’s stake acquisition in PT Eagle High Plantations Tbk – which owns a large tract of brownfield land – will come into play at some point. However, it is believed that FGV may participate in a managerial capacity in Eagle High at some point.
As for Felda, the agency would be able to consolidate the landbanks in a bid to improve efficiency. By doing this, it can enlarge its revenue base and income source, something Felda sorely needs to achieve its ambitions.
At the same time, the agency would have to bear the cost of replanting in order to improve its landbank’s age profile of around 15 years. FGV has spent more than RM200mil annually in order to replant at a rate of 15,000ha a year. Despite this, around 37% of the landbank under its control still has an old age profile of 21 years or more presently. However, the added cash flow contributions from running its own landbank will help Felda in future fundraising exercises, especially if it intends to raise debt. Shahrir has said that the agency may consider a sizeable long-term sukuk for working capital purposes and for repaying existing loans.


– ANN

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