SINGAPORE (Apr 15): The Federal Land Development Authority’s planned review of its 99-year land lease agreement (LLA) with FGV Holdings is not expected to work out well for FGV, which is heavily reliant on Felda’s resources.
“It will be negative to FGV’s earnings, should Felda amend the terms in the existing LLA and require FGV to pay a higher lease for the land. But, at this juncture, it is unclear if Felda can amend the terms of the LLA easily,” regional head of plantations research at CIMB Investment Bank Ivy Ng tells The Edge Financial Daily when contacted.
If Felda decides to terminate the LLA — which the White Paper on Felda tabled in Malaysia’s Parliament on April 10 revealed has been detrimental to the government agency — then it would have to compensate FGV in accordance with agreement’s terms and conditions, says Ng.
“We are unable to estimate at this juncture the earnings impact for FGV in the event the LLA is terminated, as we are not able to ascertain the compensation amount.
“However, we do think that if this happens, it is likely to be negative for FGV, as they will be losing one of their key earnings contributors, as a large portion of past FGV earnings are derived from the estates it leases from Felda,” Ng adds.
According to FGV’s 2017 annual report, the group has 334,595ha of planted palm oil estates in Malaysia, and 12,519ha of rubber estates. It also states that under the LLA it inked with Felda in November 2011, the leased land comprises both planted oil palm and rubber areas. Based on previous news reports, the LLA involves some 320,000ha.
A local analyst, who declined to be named, concurred that the development is not good news for FGV. But one way for both to resolve the matter without affecting other shareholders too much would be to take FGV, which has been listed on the Main Market of Bursa Malaysia since June 2012, private.
“If the revision is to proceed, the easy way out would be privatisation. Take the company private before revising the terms so that minority shareholders can be out of the picture,” the analyst says.
The analyst adds that any upward revision of Felda’s profit-sharing portion from the existing 15% would translate into lesser profits for FGV shareholders.
“As a shareholder, why would I want to agree to such terms? They could take back the land, but that makes little sense. FGV would be left with next to nothing since that would mean pretty much all of its Malaysian estates are subject to the agreement,” the analyst says.
FGV rose to a 2019 high of RM1.30 on a volume of more than 57 million shares on April 10 before ending at RM1.25 on April 11. Year-to-date, FGV’s shares are up 71%.
During the debate on Felda’s White paper in Parliament on April 10, Minister of Economic Affairs Mohamed Azmin Ali announced that Felda would be reviewing the LLA it has with FGV, to seek a better deal for all involved. Felda is FGV’s major shareholder with a 33.7% stake.
“Felda is in discussion with the management of FGV to relook the terms of the agreements that have been agreed upon previously so that they will benefit all parties, particularly the settlers,” he said.
During his speech, Mohamed Azmin said Felda should receive an annual payment of RM248 million ($81.5 million) plus a 15% share of plantation profit generated from the 99-year lease of its commercial land.
Felda, however, only received an average of RM400 million a year from FGV, versus the minimum requirement of RM800 million per year to manage the plantations and to ensure the livelihood of settlers. — The Edge Financial Daily
Tan Xue Ying is a writer with The Edge Malaysia
