WHAT have been three tumultuous years for Felda Global Ventures Bhd culminated in the global agricultural and agri-commodities company posting its worst-ever quarterly loss recently. Worse still, it is being removed from the Kuala Lumpur Composite Index at the end of this month.
Since debuting on Bursa Malaysia in June 2012, FGV’s share price has more than halved while its capitalisation has shrunk to RM7 billion from RM16.6 billion during its initial public offering. Not surprisingly, some of Felda’s settler groups have been vocal in their criticism of the decline in the company’s profit as the IPO had been touted as earnings-accretive for the stakeholders.
In its results for the quarter ended March 31, 2015, FGV (fundamental: 1.15; valuation: 1.40) reported a core net loss of RM44 million due to weaker fresh fruit bunch output arising from the east coast floods late last year. More worryingly, revenue for the quarter fell to RM2.96 billion from RM3.73 billion a year ago.
The group has been beset by a slew of nagging problems, particularly the relatively old tree profile of its plantations as well as high production costs. Apart from contractual obligations that are unique to FGV — namely its costly 20-year land lease agreement with Felda, a loss-making soybean crushing operation in Canada has also been a drag on its earnings.
Nevertheless, it is apparent that FGV’s share price has depreciated much faster than that of its peers in the sector. At RM1.92 last Friday, the stock had a price-to-book ratio of just 1.1 times compared with IOI Corp Bhd’s 4.5 times and Genting Plantations Bhd’s 1.8 times.
A plantation analyst with a bank-backed research house says the market would have factored in most of the negative developments at FGV by now. Additionally, the group’s 2015-2020 business model, which was unveiled last month, indicates a streamlining of resources across all segments.
“FGV’s cost optimisation initiative is the most important component of its business plan. Proceeds from the divestment of non-core assets, such as in its downstream business, could be channelled into its upstream operations, especially to reduce production costs. Its output volume is massive, so the improved margins would go a long way in boosting core income,” she explains.
Rationalisation is afoot for assets in its downstream division, some of which hold a lot of intrinsic value. The group is said to be seeking buyers for its Canadian subsidiary, Twin Rivers Technologies-ETGO du Quebec (TRT-ETGO), which has been making losses for some time now due to negative crushing and refining margins.
The benefits of a divestment are twofold for FGV. TRT-ETGO’s assets, namely its soybean and canola crushing plant and oil refinery, carried a net book value of RM176.15 million as at Dec 31 last year. The plant has a crushing capacity of 3,000 metric tons (mt) and a refining capacity of 1,200mt per day.
Additionally, FGV will most likely be able to pass on to the buyer its derivative contracts for the delivery of soybean and canola to the Canadian plant. The contracts had a notional amount of RM1.08 billion as at March 31 or about half of FGV’s total derivative exposure.
With US soybean prices rebounding due to an increase in biodiesel production requirements mandated by the US Environmental Protection Agency, FGV may even be able to sell the derivative contracts at a profit. As at March 31, the fair value of the contracts stood at RM15 million, indicating that the positions are already profitable.
In a May 27 note, AmResearch upgraded FGV’s rating from a “sell” to a “hold”, citing the possibility of a financial turnaround by the end of this year.
“The Canadian unit disposal is expected to be announced by the third quarter of this year. The refining division in Malaysia is also expected to turn around due to an internal tolling arrangement whereby the sourcing of CPO (crude palm oil) would be facilitated by a trading unit. Additionally, FGV’s biodiesel unit broke even in the first quarter,” says the research house.
The new tolling arrangement has resulted in significant revenue growth for FGV’s trading division, noted CEO Datuk Emir Mavani Abdullah in a recent statement. “The trading, marketing, logistics and others (TMLO) segment has more than doubled its revenue, from RM200 million in 1Q14 to RM532 million in the latest quarter. We expect this to become a large and stable revenue contributor to us,” he said.
Moving forward, an immediate fix for FGV would be to control its current production cost of RM1,534 per tonne, which is above the industry average. However, this would be challenging, given that only a fifth of FGV’s 349,000ha of planted acreage comprises prime trees, indicating minimal upside for total yield. However, this figure is expected to improve considerably over the next three years as the bulk of its young trees reach prime age.
From a fundamental standpoint, the stock currently provides a good entry opportunity based on its book value of 1.1 times. Its dividend yield has averaged to more than 5% over the past two years, an impressive feat considering the downturn in CPO prices in the same period.
Nevertheless, the stock may experience further selldown this month in the light of its impending removal as a KLCI constituent as fund managers adjust their portfolios to account for FGV’s exclusion from the index. However, any further downside risk to the share price may no longer be reflective of its current fundamentals.
FGV wants to be seen as a long-term investment, and it is worth noting that there are multiple catalysts that could become apparent over the next three years. With the divestment of its non-core assets and improved yields, the group’s balance sheet would strengthen and its profits grow significantly, particularly if CPO prices rebound over the medium term.
According to Bloomberg data, there are nine “hold”, eight “sell” and no “buy” calls on FGV.
Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.
This article first appeared in The Edge Malaysia Weekly, on June 8 -14, 2015.
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