FGV’S business transformation work in progress

PETALING JAYA: Much has changed at FGV Holdings Bhd since its chairman, Datuk Wira Azhar Abdul Hamid, wrote his first letter to shareholders a year ago.

The “unorthodox” letter was issued on Jan 14, 2019, just a few months after the groupwide transformation programme began late in the third quarter of 2018.

Since then, the plantation giant has seen marked improvement operationally, plugged leaks in procurements and lowered business costs.

FGV has also taken tough measures to handle reputational problems and bad legacy investment decisions. Impairments were undertaken, despite resulting in heavy losses, to put the operations back in shape moving forward.

The steady rise in crude palm oil (CPO) prices, which began in October 2018, has provided a great support to the group’s turnaround agenda.

As for its sugar business, held through MSM Malaysia Holdings Bhd, FGV is still facing excess capacity, high cost of raw material, refining cost and finance charges.

The group has said it is working to address these issues, which include getting a Chinese party to offtake 700,000 tonnes of sugar in excess capacity at its MSM Johor plant.

In his third letter to shareholders on Jan 8, Azhar says “the worst is over” and the group is on the right path towards a “far better future”.

FGV aims to reposition itself as a major player in the agriculture and food industries, which is not wholly dependent on CPO price for its performance.

Thus far, the favourable outcomes from the transformation programme seem to have been well received by investors.

After hitting its all-time-low of 63.5 sen on Dec 14, 2018, the FGV stock has risen by almost 144% to RM1.55 as of Jan 10.

However, it is worth noting that the share price is still well below its initial public offering price of RM4.55, at a discount of 66%.

For now, FGV’S transformation programme remains work in progress.

The plantation player failed to meet all the targets that were set for 2019, according to Azhar in his latest letter to shareholders. He said the targets were “aggressive” at the time they were set.

Despite that, Azhar describes FGV’S achievement as “remarkable operational transformation”.

FGV’S fresh fruit bunch (FFB) production as at November 2019 rose by 8.9% year-on-year (y-o-y) to 4.17 million tonnes. FFB yield as at November 2019 was up by 12.5% y-o-y to 17.28 tonnes per hectare.

Meanwhile, the CPO cost excluding mill has been slashed by nearly 20% y-o-y to RM1,461 per tonne.

Moving forward into 2020, FGV targets an FFB production growth of 2% to 4%, underpinned by an increase in mature area and manpower.

FFB yield is expected to grow by 4% to 6% in 2020, with a similar growth range estimated for CPO production.

This will also be underpinned by FGV’S plan to replant 15,000ha per year in order to achieve a normalised age profile of 12 years by 2026.

Currently, according to CGS-CIMB Research, the age profile is 13.2 years.

During the 12th Malaysia Corporate Day held by CGS-CIMB Research on Jan 6-7, FGV chief executive officer Datuk Haris Fadzillah Hassan said the company plans to expand its integrated farming division through the planting of inter crops during the three-year immature stage of the planting cycle.

The venture is expected to deliver a profit of Rm150mil every year to the company, according to a note by CGS-CIMB Research.

“It is also looking to tap the potential of the renewable energy division by unlocking the value of its waste via biogas, in efforts to raise its pre-tax profit from this venture from Rm46mil in 2019 to Rm100mil over the next few years,” the research firm said.

FGV is confident that its efforts to improve its estates will continue to bear fruits in 2020, leading its plantation division to return to profitability.

“While we are positive on its turnaround efforts, we are of the view that the plans to expand its new earnings stream will take time to bear fruits; near-term concerns include potential lower yields from its estates and continued losses from its sugar division,” said CGSCIMB Research.

FGV’S achievement is a remarkable operational transformation. Datuk Wira Azhar Abdul Hamid