Zakaria makes his moves in FGV
CEO begins task of turning the planter into a leaner entity and reversing falling earnings
FELDA Global Ventures Bhd has found itself at the crossroads. Amid a slowdown in production as well as potentially further erosion in earnings, the group now must strike a fine balance between improving operational efficiency and realising its growth aspirations, say observers.
Datuk Zakaria Arshad is the latest executive to undertake this endeavour. As the third CEO to take the reins of FGV in four years of being listed, he has the unenviable task of turning the group into a leaner entity and address concerns over its depleting earnings.
With billions of ringgit spent on high-profile acquisitions and little to show for in terms of earnings growth, FGV’s many stakeholders have patiently waited to see a reversal in the group’s fortunes.
However, FGV’s defenders say that the palm oil business is known for long gestation periods, particularly as the group is in the midst of a vast replanting and crop replenishment exercise. Over the past four years, the group has invested more than RM1bil for this effort.
FGV’s previous CEO, Datuk Emir Mavani Abdullah, had in the past reiterated that the group’s performance should be judged within a timespan of at least five to ten years.
Sources tell StarBizWeek that one of Zakaria’s first moves since taking over as CEO was to scrap the proposed RM976.25mil purchase of China edible oil company ZhongLing Nutril Oil Holdings Ltd which had been nearly a year in the making.
As a second generation settler and having built a 30-year career within Felda’s group of companies, Zakaria is said to know FGV inside and out. He is set to unveil his own blueprint on transforming FGV’s business soon, which is said to be a major leap from that of his predecessors.
During a media briefing on May 9, he emphasised the need to protect the interests of the 102,100 Felda smallholders who form the backbone of the country’s palm oil industry.
This was evident in the group’s move to withdraw its Roundtable of Sustainable Palm Oil (RSPO) certificates for its 58 mills on May 3. This is done so that it can undertake a three-year training and awareness program on certified sustainable palm oil for its smallholders.
The recertification and retraining exercise will cost the group up to RM34mil during the three year period, the group said.
“While some may say that the RSPO withdrawal is a negative move, what we want to do is to strengthen our image as a socially responsible agribusiness. We will make sure that no smallholder is left out,” he said.
Zakaria has already made substantial changes within FGV’s core management by promoting key personnel into his circle.
Among them are a new head of palm upstream cluster, a new chief strategy officer, a new head of operations strategy, and a new head of sustainability and environment, a department that was just recently set up.
However, with FGV’s next annual general meeting coming up in June, Zakaria may have to defend the group’s previous asset buys which so far have yet to bear fruit.
There is also the question over the planned RM2bil-plus acquisition of Indonesia’s PT Eagle High Plantations Tbk which is still in limbo.
Despite a series of major acquisitions over the past three years, most notably that of Asian Plantations Ltd (APL) for RM628mil and Pontian United Plantations Bhd (PUP) for RM1.2bil, FGV’s total production of fresh fruit bunches has declined despite the injection of new landbanks totalling some 40,000ha from APL and PUP.
FGV’s total crude palm oil (CPO) was essentially flat in recent years. The group produced 3.11 million tonnes in 2014 and 3.1 million tonnes of CPO last year. Meanwhile, its total production of fresh fruit bunches (FFB) amounted to 4.97 million tonnes in 2014 but fell to 4.36 million tonnes in 2015.
This shows that overall output is depreciating rapidly, partly due to old palm trees making 40% of its total planted landbank of about 350,000ha.
Additionally, the El Nino phenomenon is making things worse. According to CIMB Research in a recent note, FGV’s year-on-year FFB output decline of 16% during the first quarter this year (Q1) was significantly poorer than the 10% decline recorded by the Malaysian palm oil industry.
In fact, earnings from the group’s sugar business outpaced its palm upstream seg- ment for the first time during its financial year ended Dec 31, 2015 (FY15). The sugar segment reported RM399.8mil in pretax profits last year, compared to RM349.24mil from the palm upstream side.
This decline threatens FGV’s earnings prospects as even the sharp rise in CPO prices may not be enough to offset the shortfall in output. FGV is set to release its first quarter (Q1FY16) results by the end of this month.
“FGV’s upcoming Q1’16 results will likely disappoint at near breakeven level. We expect its plantation division to turn in losses due to its high production cost base, though this could be mitigated by stable earnings contribution from its sugar business,” said Maybank IB Research in a recent note.