This article first appeared in The Edge Malaysia Weekly on April 2, 2018 - April 8, 2018

ANALYSTS who cover Felda Global Ventures Holdings Bhd (FGV) generally have a wait-and-see attitude towards its stock.

According to Bloomberg, of the 12 analysts who cover FGV, eight recommend a “hold”, “neutral” or “market perform”, three a “buy” and one a “sell”.

“Investor sentiment on the performance of the company has been reflected in its share price since its results for last year were announced in February. Unless there is any fresh news from the company, the share price will likely remain at its current level,” says Ivy Ng, head of Malaysia research and regional head of agribusiness research at CIMB Investment Bank Research.

The stock has been volatile, hitting a 52-week high of RM2.18 on Jan 15 last year and dropping to a 52-week low of RM1.51 on June 6.

This year, an improvement in FGV’s share price will depend on better fresh fruit bunch (FFB) production, how the company manages its costs and the price of crude palm oil (CPO), says Ng.

“I know the management is working hard to ensure an improvement in yields. But it is too early to say if they can pull it off this year … it all depends on their execution.

“As a plantation business, they need to consistently improve their agronomic practices over the long term to produce better yields. This is something that needs time; it cannot be done overnight,” she adds.

Ng has a “hold” call on FGV and a target price of RM2.12.

It is noteworthy that FGV improved its financial performance in FY2017 with its net profit increasing to RM143.73 million from RM31.47 million the year before, boosted by a gain on disposal of a long-term investment.

Better earnings in FGV’s plantation and logistics and others (LO) segments helped offset the disappointing performance of its sugar business under MSM Malaysia Holdings Bhd. Plantations and LO contributed RM554.182 million and RM45.18 million respectively to earnings compared with RM233.8 million and RM7.96 million in the previous year. The sugar business contributed RM1.9 million, down 98.8% year on year.

In an interview with The Edge, chairman Datuk Azhar Abdul Hamid says the group aims to make LO a pure play business that can compete with other transporters, and have 60% of revenue come from outside FGV.

“If they don’t touch that, then, really, they are not a business,” he declares.

Ideally, the percentage contribution of the three segments to the group should be 50:25:25 compared with plantations making up 75% of the group’s earnings at present.

On FGV’s move to streamline its operations, Azhar says the company is negotiating the sale of two non-core businesses, but declines to say more.

A fund manager, who spoke on condition of anonymity as he had “nothing good to say about FGV”, feels that the company is still tainted by the scandals related to the Federal Land Development Authority (FELDA) in the past.

There have been negative news reports on FELDA, which holds a 33.67% stake in FGV, every few months.

For instance, in July last year, the Malaysian Anti-Corruption Commission made arrests following Felda Investment Corp Sdn Bhd’s (FIC) acquisition of a hotel in Kensington, London, at an inflated price of £60 million or RM330 million then.

Similarly, in 2014, FIC forked out between RM40 million and RM50 million more than market value for a luxury hotel in Kuching. This too was investigated by the MACC.

More recently, there were claims of a land grab involving FELDA’s assets in Jalan Semarak, but these allegations died down after the land was returned.

“The management still has a lot to prove that they have moved on from the scandals, their yield is dropping and their gearing is high. I don’t think it is a reliable stock,” the fund manager says, adding that the share price is still expensive, considering its high PER (price-earnings ratio) of 41.75 times it is trading at now.

“Anyone who is buying the stock now is [buying] based solely on speculation,” he remarks.

A fund manager with a foreign stockbroking house does not like the volatility of FGV’s shares. “Too risky for my appetite,” he says.

In stark contrast, Thomas Soon, plantation analyst at KAF Seagroatt & Campbell, has a “buy” call on FGV and a target price of RM2.61, which is at a 55% premium to the current price of around RM1.70.

“It appears as though the worst is over for FGV … it’s a definite ‘buy’,” he comments.

According to Soon, FGV’s aggressive replanting in the last 10 years has borne fruit, its results have been improving in the past few quarters and its labour issues have been resolved.

Azhar concedes that the management’s biggest responsibility is to constantly show positive results. “Because if they don’t see us making the right moves as far as our business objectives are concerned, they will dump us overnight. Look at what happened to EPF (Employees Provident Fund). When EPF was on our board, I think the representative then was not happy with the way FGV was being managed. And boom! They sold our shares and left the board,” he recalls.

To recap, the EPF selldown came about after FGV proposed to buy a 37% stake in PT Eagle High Plantations Tbk for US$680 million in 2015.

The price was viewed as expensive and did not come with management control. The deal was aborted eventually, but FELDA bought the stake in Eagle High.

“We are not going to let that (a selldown) happen again. And we would love for EPF to come back and look at us again and trust us again. I need to make it clear that those kinds of situations will not recur,” Azhar says.

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