FGV’s proposed RPS-i improves position of FELDA and its settlers

Tuesday 22 Oct 2024

This article first appeared in The Edge Malaysia Weekly on July 10, 2023 - July 16, 2023

FGV Holdings Bhd’s proposed corporate exercise involving the bonus issue of 364.8 million new Islamic redeemable preference shares (RPS-i) announced on June 30, partly to comply with the exchange’s public spread requirement, does more than that. It would be fair to say that the exercise reverts to the old model, whereby most of the benefits derived from FGV’s business activities go back to the Federal Land Development Authority (FELDA) and its settlers.

According to the announcement, the main objective of the proposal is to give FGV shareholders “better exposure via preferential dividends to the distributable profits of the key companies under FGV that are involved in upstream plantation activities, namely FGV Plantations (Malaysia) Sdn Bhd (FGVPM) and FGV Palm Industries Sdn Bhd (FGVPI)”. FGVPM is an indirect wholly-owned subsidiary of FGV; FGVPI is a 72% indirect subsidiary of FGV.

Company filings to the Companies Commission of Malaysia (SSM) show that both companies are profitable, and paid net dividends of about RM254 million in the financial year ended Dec 31, 2021. This compares with FGV’s dividend payout of RM291.85 million for the same period.

FGVPM is involved in the production of fresh fruit bunches, rubber cup-lump and other agricultural products from the land held under the land lease agreement (LLA) between FELDA and FGV. FGVPI is involved in the processing of FFB into crude palm oil and palm kernel and the sale of these by-products.

Holders of the RPS-i have priority over the profits from these two companies while continuing to have exposure in the other businesses of the group via their ordinary shareholdings in FGV. Thus, the RPS-i will provide shareholders with a “preferential dividend income stream that is primarily derived from the distributable profits of FGVPM and FGVPI or a one-off cash lump sum upon redemption of RPS-i”, says FGV in the announcement.

The RPS-i will be quoted and traded separately on the Main Market on the local bourse.

A decade ago, when FELDA was planning the listing of its commercial units under Felda Global Ventures Holdings Bhd (now known as FGV Holdings Bhd), the settlers had feared a loss of benefits accruing to them under a new corporate structure and with new shareholders coming in.

Before the initial public offering (IPO) in June 2012, some settlers had objected to the sale of Koperasi Permodalan Felda Malaysia Bhd (KPF)’s 51% stake in Felda Holdings Bhd (FHB) —FELDA’s plantation management arm and most profitable unit — to FGV. The balance of 49% in FHB was owned by FGV then, and the members of KPF comprised staff of FELDA and its settlers.

In fact, the group of settlers who opposed the deal — Persatuan Anak Peneroka Felda Kebangsaan — took an injunction to stop the sale but, eventually, a majority of KPF members voted for it. (Initially, the plan was to have the 51% stake transferred to FGV in exchange for a 37% stake in the listed entity, but because of the opposition to the deal, the IPO was to proceed without KPF’s participation.)

In its listing prospectus, another entity — Felda Asset Holdings Company Sdn Bhd (FAHC) — emerged as a 17% shareholder in FGV. The messaging from FGV then was that FAHC would “look after” the interest of FELDA settlers.

According to SSM filings, FAHC is fully owned by FELDA.

As at March 31, 2023, FAHC had 12.42% equity interest in FGV, according to its 2022 annual report.

After a failed attempt to privatise FGV in 2021, FELDA now holds an 81.91% stake in FGV, which means it does not meet the public spread requirement of 25% under Bursa Malaysia’s listing requirements.

FGV says in its June 30 announcement that FELDA had said it intended to dispose of FGV shares as required — to comply with the public spread requirement — only after the completion of the proposed bonus issue of RPS-i.

Among brokers covering FGV, TA Securities and Hong Leong Investment Bank Research are positive on the corporate exercise.

Since the announcement, however, FGV’s share price has fallen 4.8% to last Thursday’s close of RM1.38, which valued the company at RM5.03 billion.

The proposed bonus issue of RPS-i explained

Why is there a need for FGV Holdings Bhd to undertake a corporate exercise?

The Federal Land Development Authority (FELDA) holds an 81.9% stake in FGV Holdings, following a privatisation exercise in 2021. The offer was done at RM1.30 per share to stave off a potential takeover from some parties, including Tan Sri Syed Mokhtar Albukhary’s Tradewinds.

Had the privatisation been successful, it would have paved the way for FELDA to cancel the Land Lease Agreement (LLA) that was tied to FGV during the listing in 2012. FELDA’s contention is that the LLA is not beneficial to it and the returns are insufficient for it to carry out its programmes for the settlers.

FELDA had contended that it would have received higher returns from the upstream assets it injected into FGV compared to the returns arising from the LLA.

Since the privatisation, FGV has been looking at various corporate exercises to resolve the shareholding spread as well as to appease the grouses of its major shareholder, FELDA, without infringing on the rights of the other shareholders.

Why preference shares?

Preference shares are, by nature, an instrument that indicates preference in terms of dividends. In this exercise, those holding the FGV RPS-i shares will receive dividends from two entities in the upstream segment of FGV’s operations.

The instrument is non-dilutive to the existing shareholders and given free to all shareholders. The FGV RPS-i is not convertible to underlying FGV shares but has a redemption clause.

Considering that FGV is controlled by FELDA, however, the redemption is unlikely to happen unless it is at the behest of the major shareholder.

What is the mechanism to reward holders of the preference shares?

The exercise gives FGV shareholders direct exposure to the dividends declared by FGV Plantations (Malaysia) Sdn Bhd (FGVPM) and FGV Palm Industries Sdn Bhd (FGVPI). Both entities represent a substantial portion of FGV’s current upstream operations and were injected into the listed entity.

In return, the LLA came into place to formalise the profit-sharing arrangement between FGV and FELDA.

The dividend for FGV RPS-i is based on the profit after tax at the company level of both entities. The amount of dividend to be declared is subject to the approval of the respective boards and after the books of both companies are audited.

FGV’s current dividend policy of paying out at least half of the net profit and minority interest will not be affected.

However, as holders of the FGV RPS-i are prioritised from the dividends declared by FGVPM and FGVPI, FGV shareholders will only get any remaining dividend that is declared from the overall group operations.

In bad years, FGV shareholders may not receive dividends.

How will the proposal affect existing FGV shareholders?

It has no impact, as all shareholders will receive the FGV RPS-i and, consequently, direct exposure to the upstream business. Holders of the FGV RPS-i will have priority over the dividends from the upstream business.

Ordinary shareholders of FGV will still have exposure to other assets of the company, such as the plantations acquired with the proceeds from the listing in 2012 as well as MSM Holdings Bhd.

What are the chances that the proposal will be called off?

All shareholders can vote. This means the proposal is as good as done, unless FELDA itself shoots it down.

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