This article first appeared in The Edge Malaysia Weekly on August 29, 2022 - September 4, 2022

FGV Holdings Bhd is clearly gunning for the top position in dairy farming with its ambitious joint venture (JV) that is raising RM4.5 billion to build and run an integrated facility in Chuping, Perlis.

If executed well, its 40% stake in the still unnamed dairy JV with Qatar-based Baladna — whose farm is home to 24,000 Holstein cows and whose dairy products are instrumental in the Middle Eastern country (2.9 million population) achieving 100% self-sufficiency in milk production — can be a substantial boost to the group’s fortunes that has hitherto been largely tied to oil palm.

It remains to be seen if FGV minority shareholders and others who think its share price should be worth more than the current RM1.50 level will get to enjoy some of the upside potential.

Last Tuesday, FGV — whose free float stood at 12.94% as at July 20 — announced that Bursa Malaysia Securities Bhd had rejected its request for more time to comply with the public shareholding spread requirement, adding that it is aware that the trading of its shares may be suspended as it is one of the penalties for breaching Paragraph 8.02(1) of the listing requirements.

Its controlling shareholder, the Federal Land Development Authority (FELDA) — whose filings show that it bought one million shares on Aug 1 and 1.32 million shares on Aug 4 to lift its shareholding to 81.1% (12.415% held indirectly) — had in a letter dated Aug 2 “maintained its intention not to retain the listing status of [FGV] as indicated in its privatisation offer dated January 2021”, the announcement to the stock exchange dated Aug 23 reads.

FGV’s share price was little changed post-announcement, closing at RM1.50 last Thursday to give the company a market capitalisation of about RM5.5 billion, which is only a quarter of the RM19 billion it commanded upon its debut on the Main Market just over a decade ago on June 27, 2012, after selling shares at RM4.45 apiece (adjusted to RM3.55), Bloomberg data show. FGV’s market value had already slipped below RM10 billion by end-2014 but is currently double its all-time low of only RM2.3 billion in late December 2018, when its share price dived to as low as 58.5 sen apiece.

Except for RHB Research (“sell”, target price: RM1.25), six of the seven analysts who updated their recommendations in August have target prices above the RM1.30 per share that FELDA offered to privatise FGV in early 2021, Bloomberg data show. The highest is TA Securities’ RM1.85, which is the only research house with a “buy” recommendation. AmInvestment Bank has a “sell” call with a target price of RM1.35, while four other research houses have “hold” recommendations.

At the time of writing, there were no indications as to whether FELDA was going to make another takeover offer for FGV.

According to the Aug 6 announcement, however, FGV and Baladna will be taking a 40% stake each in the proposed JV and lesser-known Touch Group Holdings Sdn Bhd the remaining 20%. Some 70% of the RM4.5 billion project is to be raised via borrowings by the JV vehicle itself, with the remaining 30% (RM1.35 billion) coming from the equity of the three JV partners.

When contacted by The Edge, FGV CEO Mohd Nazrul Izam Mansor says the company “is not privy to any information or [privatisation] plans by FELDA”.

“As per FELDA’s offer document dated Jan 12, 2021, of the unconditional mandatory takeover offer by FELDA to acquire all the remaining ordinary shares in FGV, FELDA stated that it does not intend to maintain the listing status of FGV. FELDA has indicated that this intention remains unchanged,” he tells The Edge in an email reply.

On the JV, he says FGV will need to put in RM540 million, including the 3,359ha parcel in Chuping, whose value is subject to an independent assessment.

“Subject to the valuation of the main site, the remaining capital injection is expected to be over 10 years of operations, with 65% of the capital injection to be used within three years of the project’s commencement,” says Mohd Nazrul.

The remainder of the capital injection for the project will be from the other JV partners, as well as external borrowings that will be raised by the JV company.

As at March 31, FGV had RM1.2 billion cash but total borrowings of RM1.64 billion.

“FGV will rely on its internal funds, cash flow and assets to fund the proposed investment. If required, FGV will look at external financing to fund its portion of the investment. Any investment decision by FGV, which will include, among others, the evaluation on funding options, will go through its internal governance process when it comes to investments,” he replies when asked whether FELDA’s 81% stake in FGV would hamper fundraising.

Plans to build a dairy farm business in Malaysia with Baladna have been mentioned in the market since October 2019, when then prime minister Tun Dr Mahathir Mohamad visited Qatar’s largest dairy producer. At the time, it was the Federal Land Consolidation and Rehabilitation Authority Bhd (Felcra) that first signed a memorandum of understanding (MoU) with Baladna to set up Malaysia’s largest dairy farm and be part of its National Food Security Policy. Two years later in 2021, Felcra and Baladna roped in FGV as a partner when signing an MoU to carry out a technical and feasibility study for the said project. However, in April this year, Felcra announced its decision to withdraw from the partnership to focus on its core business.

Mohd Nazrul says an independent adviser was hired in April to conduct a feasibility study for a dairy farm in Chuping and initial findings are promising. “Based on the initial feasibility study, the project is expected to generate at least RM2.7 billion in revenue per annum by year 10 of operations from liquid milk alone. We expect revenues to be much higher when other dairy products are included to be produced and sold by the JV company.”

He adds that the second phase of the feasibility study to look into the financial viability of the project is currently ongoing.

Mohd Nazrul, 46, who was appointed CEO in August last year, was previously CEO of Felcra.

FGV is not new to the dairy farm business. In 2020, it bought a 60% stake in RedAgri Farm Sdn Bhd for RM10 million. Mohd Nazrul says the farm now has more than 200 cows and is producing one million litres of fresh milk annually, marketed under the Bright Cow brand.

He adds that the JV with Baladna will market products under its own brand once the farm is ready in 2025.

According to the announcement dated Aug 6, FGV will get to name the chairman and chief financial officer, as well as the heads of human resources, legal and corporate communications, while Baladna will name the CEO and the heads of operations, sales and marketing, and IT.

Mohd Nazrul says the foray into the dairy farm business is part of the group’s larger plan to position itself as a world-leading agribusiness player, focusing on food and consumer products. “The proposed JV will be a springboard for FGV to further strengthen its presence in the food industry in addition to its existing consumer products — SAJI and Ladang’57.”

Among the products sold under FGV’s in-house SAJI brand are cooking oil, rice, sugar and coconut milk, while the Ladang’57 brand is mainly for fresh produce such as pineapple, corn and fresh chicken.

“There is a need for plantation companies in Malaysia to develop and market higher value-added agriculture products and strengthen its presence in the consumer products space,” he says, noting that the proposed JV is “in line with FGV’s aspiration to champion the implementation of the National Agrofood Policy 2.0 that has a National Food Security agenda”.

Furthermore, the proposed joint venture enables FGV to create more value from existing resources, including the utilisation of FGV Chuping Agro Valley (FCAV) land, which has been designated as an agricultural development zone by the Northern Corridor Implementation Authority (NCIA).

“Immediate synergies [with the JV] would be the expansion of FGV’s palm-based circular economy such as animal feed. There is also further expansion of FGV’s current distribution and logistics business, which supports the sale of oils and fats products in Malaysia,” says Mohd Nazrul.

According to him, the JV company targets to have 10,000 cows in the first three years of operations and expects to increase the herd to more than 20,000 over 10 years of operations.

“More than 80% of the 3,259ha in Chuping will be used for forage and grain corn plantation for dairy cattle feed. All of the animal feed production from forage and grain corn plantation will be used for the dairy farm project,” says Mohd Nazrul, adding that FGV will assist the JV company to manage and operate the forage and grain corn plantation and production of animal feed.

The JV company may also utilise FGV’s animal feed product under the brand ALMA, he says.

One of the world’s largest oil palm companies, FGV’s 2012 IPO is still one of the largest listings on Bursa Malaysia to date. Its share price performance, however, has been a huge disappointment for most investors. Its past decade as a large listed entity had been hampered by a myriad of issues, from ageing oil palm trees to a dwindling cash pile and questionable acquisitions.

Attempts to turn around the company have been a main theme over the past years with the group undergoing multiple transformation plans but having little success.

Excluding financial year 2021 (FY2021), the group’s top line and bottom line over the past five years has largely been flat. FGV enjoyed bumper earnings in FY2021, posting a net profit of RM1.17 billion, compared with RM146,000 a year earlier. This was largely thanks to the commodity supercycle that saw CPO prices hit a high of RM6,875 per tonne in that financial year. The group is also involved in sugar refining and logistics.

FGV’s diversification into agribusiness was first mooted by its former chairman Datuk Wira Azhar Abdul Hamid, who was appointed in 2017. The aim was to reposition FGV as a major player in the agriculture and food industries, so as not to be overly dependent on CPO prices.

Under Azhar’s stewardship, FGV also took measures to manage reputational issues and deal with questions raised about legacy investment decisions that resulted in sizeable losses. Legacy issues included its high-priced acquisitions of Pontian United Plantations Bhd for RM1.21 billion and Asian Plantation for RM628 million, which did not bear fruit for FGV. In 2018, FGV had to take on a massive impairment of almost RM1 billion for investments made between 2012 and 2014.

For the upcoming dairy farm project, FGV says the JV company targets to produce 100 million litres of fresh milk by 2025. The plan is to see the dairy farm produce 300 million litres per annum from 2035 onwards.

Going by these numbers, it is clear that FGV has an eye on becoming the largest fresh milk producer in the country.

For perspective, Farm Fresh Bhd, the country’s largest dairy producer, has an annual capacity of 137 million litres of finished goods from its facilities in Malaysia and 84 million litres of processed milk from its facilities in Australia. It has a total of 10,309 cows across six farms.

Farm Fresh also produces non-dairy products such as UHT milk, soya bean milk and oat milk. The company has a market capitalisation of just over RM3 billion. For the financial year ended March 31 (FY2022), it recorded revenue and net profit of RM501.9 million and RM78.6 million respectively, indicating a profit margin of 15%.

Mohd Nazrul says Chuping is suitable for dairy farming as 95% of the land is flat, with abundant underground natural water. Apart from dairy farming, more than 80% of the land will be used for forage and corn that will be used as the main cattle feed.

Mohd Nazrul says Baladna has the technical expertise to set up a dairy farm that can achieve production of 100 million litres of fresh milk per annum. Baladna is a subsidiary of Baladna QPSC, which is listed on the Qatar Stock Exchange.

“Baladna has the requisite technical expertise in the dairy farming business, proven by its success in Qatar. The company has transformed its operations into a leading dairy producer in Qatar to ensure the country’s dairy demand is met pursuant to the economic blockade imposed by its neighbouring countries in 2017,” he says.

“Considering its success, Baladna is keen to expand its presence beyond Qatar, and found Malaysia to be the best place to start its expansion, given its readily available infrastructure and high growth of dairy consumption.”

According to Baladna’s website, the company through its subsidiary Baladna Food Industries WLL (BFI) was established in 2014 and is Qatar’s largest dairy and beverage producer, supplying over 85% of the country’s fresh milk. The 24,000 Holstein cows on its farm produce 300,000 litres of milk daily.

When asked about FGV having Touch Group as its JV partner, Mohd Nazrul says, “Touch Group is a Malaysian holding company involved in various business activities, including agriculture and farming. It is a well-established and professionally run company. Recently, in 2021, it divested its telecommunications infrastructure subsidiary, Touch Mindscape Sdn Bhd, with 1,000 telecom towers (primarily in Pahang, Negeri Sembilan and Melaka) to edotco Malaysia Sdn Bhd for RM1.7 billion. As such, Touch Group’s participation in the proposed JV would strengthen and add value to the composition of the shareholders.”

A company search shows that Touch Group is linked to Pahang royalty. Its website states that the company is involved in dairy farming and milk production, with distribution under its subsidiary Touch Milk Sdn Bhd. However, it is unclear how big the farms and production numbers are.

Asked why FGV is only taking a 40% stake in the JV, Mohd Nazrul says the shareholding will allow the company to de-risk its investment exposure while benefiting in terms of knowledge transfer from a strong and established dairy and consumer player such as Baladna.

“The JV company’s shareholding structure is also aligned with the national interest, as the shareholders’ agreement requires the JV company to always be 60%-owned by Malaysian entities — FGV and Touch Group. This requirement is critical as the project has a positive impact on not only the shareholders, but is also in line with the country’s economic and National Food Security agenda,” he adds.

With many players entering the dairy farming business, however, what is certain is that there is a need to ensure that FGV’s JV not only caters for the local market but its products are also of export quality. The latter would be key to ensuring that the RM500 million poured into the dairy farm venture by FGV will bolster the group’s financial performance. Lest history repeats itself.

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