FGV on the tough road to recovery
Group CEO Datuk Haris Fadzilah Hasan has the challenging task of turning the plantation outfit around. Helping him is the current robust price of CPO.
IT has been a collage of issues that have dragged FGV Holdings Bhd into the mire in recent years. Scandals and losses whittled away at the profitability of FGV to a point the once proud company became a husk of its former self.
With the cash from the initial public offering almost exhausted and saddled with assets that are underperforming, FGV underwent a rejuvenation process to swing its fortunes around.
The headline-grabbing news of pay cuts and lawsuits to mountains of operational issues soon gave way to some optimism. Issues still persist but admission of the problems and an execution plan to shake things up has seen its stock rebound in recent months.
Sure, the sharp spike in the price of crude palm oil (CPO) has helped but that and the expectations of the turnaround has seen its share price rise by 40% in just over a month.
“To be honest, even though there were changes in the board of directors and management, there is a perception in the market and that is the toughest part to overcome,” FGV Group CEO Datuk Haris Fadzilah Hasan says.
“When we meet analysts and ask them why the rating of our shares is very low, they say there is a lingering perception issue.
“That is why governance and integrity is something that we have to deal first.”
Haris says it can only grasp what it can control and that is going back to the fundamentals of the business in the transformation of FGV.
“Let us focus on something that we can control like getting back to the basics. We are going back to the fields and see we can do with regard to the yields, the oil extraction rate and to the cost at the mills,” he tells Starbizweek recently.
“These are the things that the team has been working hard for over the last one year and we are starting to see good results coming from the fields.”
Transformation
Internal changes have been made in the transformation process of FGV. There are no longer politically-active board members and there’s an infusion of professional directors. The board has also embraced racial diversity and women represent a third of the directors.
Shedding its political links will be difficult given the influence of FGV and its 33.6% shareholder Felda in 54 parliamentary constituencies.
“Now, I can safely say that for the past 10 months there is no political pressure. I hope it will stay that way,” he says, speaking of the tenure he has been as the top executive of the plantation company.
The cleansing has also led to efforts to change the group’s corporate culture. That, Haris says, is the hardest part given that the environment with the group has not changed despite it becoming a listed company in 2012.
The urgency to change with whistle blowing being inculcated is important, given changes to the enforcement of the laws pertaining to corporate liability next June.
“But one thing that I am also aware of is this organisation has gone through many transformations since its IPO, so there is fatigue there,” he says.
Haris’ focus has also been on making things better but the low price of CPO for much of that time had not helped.
It has made the going tough but the group is looking to salvage what it can from spending a lot of the Rm4.5bil it received from the IPO.
An evaluation of past investments has shown an underperformance of many of the assets it bought which did not give the expected returns.
What FGV wants to sell is Trurich Resources Sdn Bhd and Asian Plantations Ltd (APL).
He says a clean-up is in progress and is looking at divesting up to Rm350mil worth of non-performing assets.
From that Rm350mil, FGV has received about Rm150mil and highlighting the challenges is its deal for APL, where only 8,000ha are planted with oil palm trees, and only 5,000ha are productive, from an area of 24,000ha. APL was bought for close to Rm1bil.
Impairments last year amounted to about Rm1bil and APL accounted for Rm700mil of that.
The rest is for investments such as Felda Global Ventures-cambridge Nanosystems Ltd and its M2 Plant in Kuantan.
“We also talked about cost savings of about Rm150mil from procurement processes and we will surpass the Rm150mil target by year-end and we are looking at Rm155mil to Rm170mil in cost savings,” he says.
Another area FGV is looking to cut cost from is manpower. Headcount has been slashed from 19,000 to 16,500, excluding plantation workers, and is looking to further trim its wage bill which stands at Rm1.2bil a year.
“For this year, we have this group-wide cost savings drive that is looking at a 15% reduction with regard to expenses,” Haris says.
“Over the last 60 years, this company has gone from a period where it had been very well off – so some of our discipline may be lacking. We need a bit of tightening because this company used to be rich especially after the IPO and spent without look at the potential,” he says.
“So a lot of the impairments that we’ve made is for the previous investments made in 2014 by the previous management and not on the current investments that we’ve made.”
Cost containment will also extend to its mills, which is a backbone for the group. It will also start to benchmark its plantations and mills so that best practices are adopted throughout the group.
With 68 mills nationwide, not all of the mills are operating above 80% capacity and the average is 67%. The group will also look at the overtime claims of the mills which is high. Savings is also been found by using a combination between the common and expensive fertilisers it uses in its estates and that has brought down the cost of fertilisers.
“Most estates and mills buy their own (consumables) and now it is a bit more centralised in terms some of the common items. That way we can get the volume or economies of scale when we do our negotiations (with our suppliers),” he says.
Utilising its plantation size and mills has allowed the group to leverage off its size to get cost savings from the scale of its purchases.
“If the contract can be expanded from one year to two years, then they can give us a better deal. We also have a transport company but some of our people are still using external transporters,” he says.
From its transformation to cut manpower cost, close leakages (Rm150mil) and divesting non-core assets (Rm350mil), the cost cuts are showing results.
The average cost of production (COP) in 2018 was RM1,737 per tonne and this has been brought down to RM1,464 per tonne.
“So now, FGV’S COP is comparable to other big players in the industry,” he says.
Haris says that standardisation between Felda and FGV needs to happen given the linkages between both companies.
With the adoption of the Malaysian Sustainable Palm Oil certification scheme next year, there is a need to bring smallholders up to speed with that standard given FGV buys a lot of fresh fruit bunches (FFB) from them for its mills. Some 70% of its FFB supply comes from smallholders.
MSM issue
Apart from CPO, FGV has a sugar business that is a drag on its financial performance. Losses from MSM Malaysia Holdings Bhd has been a drag and the culprit has been operations by its Johor plant.
With demand for sugar in Malaysia at between 1.5 million and 1.6 million tonnes a year, MSM’S capacity is 2.25 million tonnes and one million of that is from its plant in Johor. That does not include the capacity from other sugar refiners in the country.
MSM has 59% of the domestic market share so that extra capacity is wasted for domestic purposes. The plan is to focus on markets that have similar characteristics of Malaysia and where there is a shortage of refining capacity.
“We all know that sugar business all over the world is a protected industry and it is true that we are looking for a strategic foreign partner for the export offtake because we don’t want them to flood the domestic market,” he says.
“Our preference is a foreign strategic partner with its own access to its market and maybe it would have the advantage with raw sugar or logistics.”
FGV intends to sell its entire stake in its Johor plant or at the minimum just keep a 30% stake. That way, it will be able to repay a Rm600mil loan taken for the Johor plant. It took a loan of Rm1bil to build that plant.
With the sugar business being volatile and Malaysians consuming less sugar per person, FGV sees further liberalisation in the sugar business. Import permits are now issued for the sugar business.
“As you know, when we squeezed the palm fruits FFB at the mills, the byproduct is the empty fruit bunch or EFB.
“We are producing about 3 million tonnes of CPO per year, from which we get 3.47 million tonnes of EFB. This is biomass in the form of palm kernel shell.
“In fact, Felda Sahabat In Sabah is powering the electricity in sever
al villages there. I hope to grow renewable energy (RE) into a Rm100mil revenue for us.re will be a growing part of our business,” he says.
“Because we have so much EFB, we are also considering tying up with a foreign partner to venture into the paper and pulp business that can actually take one million to two million of our EFB stocks.
“We need to clear the EFB from our mills. We have 68 palm oil mills. Just imagine, one mill produces palm oil mill effluent (POME) which can trap the methane gas – one mill can generate 1.5KW per day equivalent to 1.5 million litres of diesel.
“So we have signed sime Darby Engineering and one company where we made available 35 sites for biocng production.
“So basically we are focusing on the food and energy business because in the future, demand will still be there given the growing population.
“On the sideline, we also lease our land for durian planting by one company. We are not putting any capex, let the expert in durian do the planting but we can provide the land,” he adds.
“To sum up, it is going to be quite an exciting additional revenue for FGV – this is what we call a multi-pronged strategy while we are getting better at our traditional oil palm business. Secondly, we are sweating our existing assets and looking at the circular economy.”
New areas
FGV has also adopted integrated farming in the replanting phase of its oil palm trees.
With 15,000ha of plantations replanted each year, it is intercropping oil palm with MD2 pineapples. It takes three years for the oil palm trees to bear fruit and, during that time, FGV can reap two harvest cycles from its MD2 pineapples.
That, together with bananas, paddy and watermelons, will allow FGV to get cash revenue while it waits for its main crop – oil palm – to start producing. Paddy planting will be done on 1,000ha.
“That will provide FGV with additional revenue of about Rm100mil per year from intercropping activities,” he says.
“While it is not big in the total scheme of things but we are generating income from idle land. On top of that, we are also focusing on the circular economy,” he adds.
OVER the past two years, there has been a drastic slowdown in the oil palm replanting activities in the country, no thanks to the weak crude palm oil (CPO) prices.
The slow replanting across the board among plantation companies and smallholders, has also led to a lower take-up rate in the planting materials and usage of fertiliser, says FGV Holdings Bhd group chief executive officer Datuk Haris Fadzilah Hasan.
Unknown to many, diversified planter FGV is a top producer of planting materials and fertiliser in Malaysia, commanding some 40% of the domestic market share.
Haris tells Starbizweek that “There is a combination of both, whereby smallholders and plantation companies have either stop replanting or have slowed down on their replanting activities in recent years.”
This year alone, FGV as a premier oil palm seed producer supplying 39% of the country’s annual seed requirements, saw about 700,000 of its planting materials not taken up by its regular customers, he adds.
FGV via its unit FPM Sdn Bhd is also a main importer and manufacturer of fertiliser with plants in Pasir Gudang, Kuantan and Lahad Datu with production capacity of about 850,000 tonnes per year.
“We noticed that the sales of our fertiliser and planting materials have slowed down in the past two years, which literally means most planters are cutting down on their fertiliser and planting materials intake,” explains Haris
Having said that, the move by planters to curb their replanting activities came as no big surprise as “this is a common practice among planters especially when the CPO prices are subdued.”
Furthermore, active replanting activities undertaken by plantation players in Malaysia and Indonesia since 2011 has resulted in an oversupply and high palm oil stockpile situation in the global market.
In July last year, the combined palm product stocks by Malaysia and Indonesia has touched a high of 7.4 million tonnes. This in turn saw CPO prices to continue to head south.
However, in a turn of events, CPO prices started to rally in October this year .
The commodity is currently trading at RM2,500-RM2,600 per tonne level - much to the excitement of most planters after the commodity hits a low of RM1,937 per tonne in July – the lowest since August 2015.
Haris points out that “The slowing down on replanting to a certain extent has created an expectation that CPO supply will be limited as planters have been cutting down on the usage of fertilisers and planting materials in recent years.
“As a result of this move, oil palm