Felda returning to industry norms thanks to new leadership team

KUCHING: Analysts are growing positive on FGV Holdings Bhd (FGV) following its restructuring plan initiated by Chairman Datuk Wira Azhar Abdul Hamid and its new management team, resolving various labour issues, measures to reduce leakages and new planting program to result in a significant improvement in cost efficiency, yields and profitability.

FGV remains one of the biggest plantation land owners in the country, yet trades at an earnings value per hectaore of about US$ 9,500, which AllianceDBS Research Sdn Bhd (AllianceDBS Research) said was a 57 per cent discount to the average of US$22,000 under its Malaysian coverage – indicating significant improvement potential.

“We believe that the expertise that the new management team can offer would bode well for FGV,” it said in a profile snapshot yesterday.

This comes as FGV has been through a tumultuous three to four years as its top officials were embroiled in corruption allegations, causing investors to lose confidence in the company.

Recall that FGV raised about RM10 billion from its initial public offering in 2012 at a listing price of RM4.55.

“We believe the appointment of Wira as chairman in September 2017 was the first positive step towards restructuring and transforming FGV,” AllianceDBS Research affirmed.

“The open letter by Wira on FGV’s restructuring plans attest to the new management’s seriousness in resolving the company’s issues. The group of new officers – namely Datuk Haris Fadzilah Hassan as chief executive officer and Tuan Syed Mahdhar Syed Hussain as chief operating officer of plantations – would be able to drive the company forward with their previous management experience across plantations and other industries, in our view.”

Among some of the issues resolved under the new leadership include labour issues, better foreign labour quotas and new sources of labour workforce. AllianceDBS Research outlined that labour shortage is a serious issue when it comes to upstream plantation players as a shortage of labour would mean that FFB will go to waste.

“We believe that the weaker fresh fruit bunch (FFB) yields, crude palm oil (CPO) production and higher overall cost of production in previous years were primarily due to the labour shortage which has been affecting FGV over the last few years,” it said.

“Also, FGV has been operating at an average of only 67 per cent of the required labour from FY15 to FY17. This was largely due to the relatively low foreign labour quotas given by the government.

“There was a point in time where FGV’s total labour estate force amounted to only 8,000-9,000 (about 30 per cent) out of the 30,000 labour force required due to the halt of foreign labour quota allowance.”

The research firm estimated that FGV’s labour turnover typically stood at about 25 per cent, thus FGV would have to hire about 6,700 workers to maintain its labour coverage rate of 88 per cent

“The labour quotas that have been given to FGV has been decent so far at about 2,000 to 3,000 workers every three months and we expect this trend to continue as the current government is championing palm oil aggressively, treating it as a key economic driver,” it opined.

“The fruits of the higher labour coverage rate of 88 per cent is only expected to be realised in 2019 as the workers require a time frame of about six months to adapt and be productive.”

FGV will also continue to gain from its management’s initiative to deal with the countries that it is hiring labour from directly, bypassing the use of an agent to save cost and be more efficient with regard to its hiring.

“Management has also identified Bangladesh and India as the two new key markets to source its labour from,” AllianceDBS Research noted.

“As of end FY18, 67 per cent of its newly recruited labour comes from Bangladesh and 19 per cent from India. The quality of its plantation estate quarters was also one of the key problems affecting the turnover of labour for FGV. FGV has been losing out to companies within a decent distance from FGV’s estates. The new management of FGV has since committed to improving the quality of estate quarters to reduce labour turnover by spending c. RM315m on the refurbishments and renovations of estate quarters. It has also identified data connectivity as a factor affecting workers’ standard of living and intends to improve data connectivity for estate quarters.”

Moving forward, FGV is targeting to secure 100 per cent of the required labour for its estates this year and plans to hire an additional 10 per cent of labour on top of the required fully in FY20F as buffer to prepare for unforeseen circumstances.

“To be conservative, we have assumed that FGV would achieve 90 per cent of the labour required by the end of FY19F and 92 per cent by the end of FY20F. We believe that the accommodative foreign labour regulations would continue due to the government’s efforts to improve and promote the domestic palm oil industry,” the firm added.