FGV: A Big Spender!!

"A billion here, a billion there, pretty soon, you're talking real money" by Everett Dirksen (He was actually misquoted) 

Last week, I posted about the possible acquisition of a 30%-stake in PT Eagle High for RM1 billion. PT Eagle High is reported to own a total Indonesian land bank of 419,006ha, of which 147,000ha are planted. The acquisition will go a long way to address the problem of old trees in FGV's estates. 

That stake was initially expected to cost about RM1 billion. It turned out that the newspaper was off the mark by a wide margin. Yesterday, we learned that FGV will be buying a 37%-stake in PT Eagle High for USD679 million (or, RM2.512 billion) plus a 98%-stake in a 47,745 ha of sugar  plantation land in Papua, Indonesia for USD67 million (or, RM248 million). 

Many analysts are not too happy with the acquisition due to its high pricing, unusual payment term and negative impact on earnings and gearing. The acquisition priced PT Eagle High at 770 rupiah per share; a 71%-premium above the last done price of  450 rupiah per share. And, before signing the S&P agreement, FGV has paid a deposit equivalent to 23% of the transaction price (as compared to the usual 10% deposit on signing the S&P agreement). 

If we look at the chart below, FGV - a great Malaysian story -  has now turned into a nightmare for those are holding onto this stock. In a span of less than 1 year, the share price has dropped from above RM4.00 to below RM2.00. Will it go to RM1.00? Who knows?

Chart: FGV's weekly chart as at Jun 16, 2015_3.00pm (Source: ShareInvestor.com)
 
The latest acquisition highlights the nagging problem in FGV: You have very limited time to address the problem of old trees by investing your IPO cash wisely. The best way to do that is to acquire controlling stake in large estates, which will come at a hefty premium.

It did  not serve the group well if this strategy is not pursued with a clear focus. Thus, its decision to invest in a London property was a serious & unnecessary diversion. Now, it suddenly announced two large acquisitions in one week! One of the deals is so far off the mark that you should organize a good briefing for analysts in order to convince them and, through them, the market. None was organized. 

The management of FGV has shown themselves to be uninterested in Investor Relation. Without good IR, you won't get a good price for your shares. Thus, you are failing to look after the interest of your shareholders- your ultimate bosses!

Notwithstanding the above, I maintain my stand on this stock as per my earlier post: FGV is a stock to be avoided but if you have already invested in it, you might as well hold it since the share price has been beaten down substantially.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, FGV.