Tuesday, June 26, 2012
FGVH- born with a silver spoon
FGVH is the third largest listed palm oil operator globally, in term of landbank. In addition, they have access to the largest crude palm oil (CPO) producer globally through its 49%-owned associate, Felda Holdings Bhd (FHB).
FGVH primarily operates in 3 business segments:
FGVH’s appeal lies in 3 areas:
1) FGVH, through its 49%-owned associate, FHB produces 3.3 Million MT of CPO in 2011. This accounts for 6.7% of the global CPO output of 49.2 Million MT in 2011. The enormous size will yield greater cost saving as well as gaining certain advantages to the group.
2) Following from this tie-up with FHB, FGV Plantation Malaysia (a wholly-owned subsidiary of FGVH) entered into an agreement with F Palm Industries (FPI) [a subsidiary of FHB] where the latter will buy FFB from FGVH, Felda settlers, F Agricultural & third parties for processing into CPO & PK. The CPO produced would in turn be sold to FGVH. This agreement took effect on March 1, 2012 and it will effectively boost FGVH’s topline & bottomline substantially. For example, FGVH’s turnover for FYE31/12/2011 was only RM4.2 billion but its projected turnover for FY31/12/2013 may be RM11.3 billion (as per ECMLibra report).
3) In addition to the FFB/CPO arrangement, it has also entered into a very attractive land lease agreement with Felda to lease 355,864 hectares of land for a period of 99 years at an annual rate of RM700 per hectare plus 15% of the plantation operating profit. This rate is applicable for the next 20 years starting from March 1, 2012. Assuming a relatively well-managed estate producing 20 MT of FFB per hectare, the operating profit is about RM10,000 per annum at current FFB/CPO prices. This means that the amount payable per hectare is about RM2,200 (RM700 plus 15% of RM10,000 profit). This compared favorably to the annual lease payment is RM3,500 per hectare that Boustead has to pay to its REIT. FGVH enjoys a saving of RM462.54 million per annum.
4) FGVH is the leading sugar refiner in Malaysia. Sugar is a stable consumer product which should give another layer of stability to its earning.
FGVH’s negative points:
1) FGVH is essentially involved in two main businesses- upstream & mid-stream oil palm business and sugar refining & distribution business. It has minor exposure in rubber cultivation; soyabean & canola seed crushing & processing; and production of oleochemical products. Its ambition is global but todate, they have nothing much to show for it. Then again, it is a relatively young company and its two main businesses are stable & do not face any serious threat.
2) Its oil palm estates are fairly old & need to be replanted. This will lead to a reduction in FFB output. However, FGVH produces 31.9% of the FFB that FPI has to process. As such, any decline will not be significant.
3) FVGH was born in rather acrimonious circumstances, with political parties in the ruling coalition & opposition vying to get the support of Felda settlers. These settlers, who were traditionally staunch supporters of the ruling coalition, are being courted by the opposition. It is possible that the sweetheart deals (for the land lease & the CPO/FFB arrangement) come with strings attached. FVGH could be called upon to do ‘national duties’ to appease the settlers and this could affect its earning. The chairman of FGVH is a former UMNO leader, Tan Sri Mohd Isa and his loyalty may not lie with the company.
ECMLibra valued FVGH at RM5.65 based on a PE multiple of 16 times its FY2012 EPS of 35.3 sen. MIDF valued FGVH at RM5.30 based on the Sum-of-Parts method. This Sum-of-Parts method derived the bulk of its value from the Plantation division, which was valued at a PE of 18 times its earning for FY2013. Sime & IOI are currently trading at a PE of 14-15 times their respective earning for FY2012.
I would value FGVH at a PE of 14 times its FY2012 EPS of 35.3 sen (based on ECMLibra). As such, my fair value for FGVH is RM4.94.