This article first appeared in Corporate, The Edge Malaysia Weekly, on May 30 - June 5, 2016.

ON his 46th day in office, Felda Global Ventures Holdings Bhd (FGV) CEO Datuk Zakaria Arshad made his first press appearance.

“Habis pantang after 45 days,” he quips, referring to the end of the confinement period women go through after childbirth in the Malay culture. His sense of humour and a brief account of his journey to the top post at the world’s largest crude palm oil producer already set him apart from his predecessor.

Zakaria is closely intertwined with the Federal Land Development Authority (FELDA), a government agency founded in the 1950s to handle the resettlement of the rural poor in newly developed areas and to organise smallholdings growing cash crops. His father, a FELDA settler, had relied on a RM100 a month allowance in the 1960s and alternated between available jobs to raise nine children.

“We struggled a lot,” he says of his childhood. 

Zakaria put off his tertiary education to try his hand at business, peddling children’s toys and selling fruit. When he did graduate from Universiti Sains Malaysia, he returned full circle to serve FELDA as an office administrator for a “good salary” of RM1,000 a month before rising through the ranks to take charge of FGV’s downstream business. The rest, as they say, is history.

With this close connection to the FELDA cause and years of experience in the plantation business, industry observers believe Zakaria is better suited than most to halt FGV’s plunging share price, earnings and investor confidence. The new business transition plan that Zakaria presented to the press and analysts suggests that he is well aware of what afflicts FGV and what to do to reverse its fortunes.

Broadly, Zakaria’s immediate strategy marks a new way of doing things at FGV. He has put together a new team to focus on improving the earnings of FGV’s existing core upstream and downstream assets and disposing of unprofitable ones.

“The whole team will be focused on yield and the oil extraction rate in the upstream. In the downstream, we want to make speciality fat products.

“We want to make our assets ‘sweat’. We will no longer buy other assets to make up for what we lack. We will try to fix assets that are unprofitable. If we can’t do that, we are not going to be emotional about them. We will sell them,” he declares.

Market observers say they are relieved that Zakaria is departing from the company’s old habit of purchasing assets at lofty valuations. Most of the RM4.5 billion raised from FGV’s initial public offering in 2012 has been spent to that end. Any more would involve high borrowings, a spike in the company’s gearing and likely erosion of shareholder value, analysts say. According to FGV, this will save the company some RM70 million in acquisition-related costs.

Zakaria aims to improve the company’s financials by prioritising profitability over revenue, contrary to FGV’s longer-term goal of achieving RM100 billion in turnover by 2020. Other notable parts of Zakaria’s plans include reducing costs and plant inefficiencies, enhancing corporate governance, building a motivated, hands-on team and sustainability practices.

So far, he has shown he means business. In his first month at the helm, the company’s plan to buy a 55% stake in China-based Zhong Ling Nutri-Oil Holdings Ltd for RM976.3 billion was scrapped. A better test of his mettle would be his willingness to turn his back on a controversial RM2.4 billion deal to purchase a 37% stake in PT Eagle High Plantations Tbk, although it is said that Felda Investment Corp will be undertaking the acquisition now. 

FGV has also withdrawn its Roundtable on Sustainable Palm Oil (RSPO) certificates, supposedly to implement a three-year plan to get smallholders up to speed with the company’s sustainability commitments.

Ivy Ng, an analyst with CIMB Research, says some of these changes show Zakaria has the right strategies in place. She upgraded FGV’s rating from “reduce” to “add” with a target price of RM1.73 after meeting him, citing a more positive outlook. Trading below its book value at RM1.32 a share last Friday, Ng say FGV’s valuation is compelling.

“I think his background means he knows hardship, appreciates what FELDA was set up for and has shown the intent to bring back its glory days. I think he can get the settlers to rally behind him and refocus to get more yield out of the estates, which is one of FGV’s biggest issues,” she explains.

Not all are convinced though. Only one other analyst has given FGV a “buy” rating. The consensus view on FGV is still overwhelmingly negative with nine houses calling a “sell”.  

A muted response to FGV’s share price since Zakaria’s appointment reflects the broader market sentiment on the company’s outlook. Making a case for FGV will boil down to numbers.

“To turn around the company, to change investor sentiment and improve the performance of its share price, FGV needs to improve yield and profitability,” notes Chong Hoe Leong, an analyst at PublicInvest Research.

Immediately pushing up fresh fruit bunch (FFB) yield is difficult when only 14% of FGV’s trees are prime. Some 43% of its trees are over 21 years old. FGV has been attempting to resolve this through a replanting programme of 15,000ha per annum since 2012. It fell short of this target last year, spending RM174.96 million and replanting only 9,966ha. FGV says it will have to play catch-up this year. Replanting costs aside, FGV has to stomach the opportunity cost of uprooting old trees.

FGV’s oil extraction rate of 20.91% was better than the industry’s 20.56% in 2015. But, its FFB yield was 17.93 tonnes per hectare, less than the industry average of 18.48 tonnes. The company expects FFB yield to see a high single-digit drop and analysts warn that the effect of the east coast floods in 2015 and El Niño early this year will show later.

Chong says, “The stress on the trees from the hot weather will only show its effect 9 to 15 months later and older trees will be more affected. So, production levels might be stable for the next three quarters but you will see the impact later. This is something that all the planters will experience.”

FGV’s financial results for the first quarter ended March 31 (1QFY2016) is a reminder of how challenging Zakaria’s task is.

The company posted a core net loss of RM61 million for the quarter despite 38.6% growth in its top line to RM3.7 billion. The losses would have been higher if not for higher associates’ earnings. Its plantation earnings suffered RM100.5 million in losses due to weaker FFB production, higher production cost and an increase in land lease agreement fair value charges. 

FFB output during the quarter fell 16% year on year. The downstream business reported only a small profit of RM1.8 million. Nevertheless, FGV expects FFB production to pick up in 2QFY2016 and projects a 40% improvement quarter on quarter. This, coupled with an improving CPO price to RM2,567 per tonne currently, is positive for FGV.

However, Zakaria says his transition plan and the operational improvements implemented under his leadership will be reflected in the company’s numbers in the third quarter of FY2016. FGV, he says, will likely return to the black by the end of the year. 

Investors have heard such talk before. But, this time, Zakaria says, “I will not overpromise and underdeliver.”

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