Eagle High: A high flyer or wingless raptor?

LAST Friday, former cabinet minister Tan Sri Shahrir Abdul Samad was appointed chairman of the Federal Land Development Authority (Felda). Previous incumbent Tan Sri Mohd Isa Abdul Samad, however, remains chairman of listed associate, Felda Global Ventures Holdings Bhd (FGV).

Shahrir’s Herculean task will be ensuring Felda’s 37% stake in PT Eagle High Plantations (EHP) purchased for a hefty US$505.4 million doesn’t become a financial deadweight, a political albatross or both.

At first sight, gaining control of the Indonesian plantation company could be a positive for Felda. EHP owns 320,000ha of land in Indonesia – one of the largest land banks in the republic, which is more than 4.4 times the size of Singapore.

Additionally, Felda is paying 25.7% less than the price tag of US$680 million offered to FGV in June 2015 for the same block of EHP shares. FGV’s higher price is because payment comprised cash and shares totalling 2.55% of FGV while Felda’s purchase is an allcash transaction.

Using fully-owned subsidiary, FIC Properties Sdn Bhd (FPSB) as the acquisition vehicle, is Felda’s acquisition of EHP justifiable?

Felda says its EHP purchase is considerably cheaper than Sime Darby’s recent acquisition of New Britain Palm Oil Ltd (NBPOL).

According to Voon Yee Ping, an analyst with Kenanga Investment Bank, Sime’s purchase of NBPOL was at an enterprise value of US$25,262 per planted hectare (EV/Ha) while the comparable figure for Felda’s EHP stake is US$12,678 – less than half that of Sime.

Enterprise Value is the purchase price or market capitalisation plus net borrowings.

Despite the yawning gap in EV, there are significant differences between the two acquisitions.

First, Sime’s purchase price of US$1.74 billion was an 85% premium to NBPOL’s last closing share price – less than half the 195% premium Felda is shelling out for EHP. Felda’s EV/planted ha is based on the Indonesian company’s recent share price of 315 rupiah.

Second, Sime obtained 100% ownership of NBPOL. In contrast, Felda is obtaining a 37% stake in EHP. Not only is Felda obtaining a non-controlling stake in EHP, it could become the Indonesian listed company’s second-largest shareholder.

Articles in The Edge and The Star note the Rajawali Group owned 74.07% in EHP. After the sale of a 37% stake to Felda, this figure suggests the Rajawali Group will hold 37.07% of EHP – a tad higher than that held by the newly-minted Malaysian shareholder.

Felda says it will nominate two commissioners and one director to EHP. Given that EHP has five commissioners and three directors, Felda won’t command a majority at either level.

In Indonesia, the board of commissioners is equivalent to Malaysia’s board of directors while the board of directors is responsible for the company’s day-to-day management.

Given Felda’s willingness to fork out a premium price, why didn’t it obtain a controlling stake in EHP? In a statement, Felda said there are reasons why it can’t acquire a controlling stake in EHP.

A Reuters article dated June 2015 suggests one possible answer. At that time, FGV was the acquirer.

If FGV decided to seek a controlling stake in EHP, the Rajawali Group said it would like to hold 21% of FGV, the Reuters article reported.

Third, Sime’s NBPOL owns 134,611ha, of which 79,885ha is already planted with oil palms while mature oil palms cover 69,068ha. Because the mature hectareage is 51.2% of NBPOL’s land area, the acquisition boosted immediately Sime’s profits.

Felda’s 37% stake in EHP doesn’t allow consolidation of earnings and land bank. Even if a financial consolidation were possible, the accretion of EHP’s earnings to Felda isn’t likely to be positive.

For the nine months ended Sept 30, 2016 EHP posted a steeper net loss of RM92.1 million compared with a RM23.4 million loss in the previous corresponding period. Analysts expect EHP’s 2017 earnings to remain in the red.

Fourth, EHP must plant its remaining land within the required period. Under Indonesia law, failure to comply within the stated time frame could result in EHP’s land being forfeited.

Only 153,250ha of EHP’s 320,000ha have been planted. Assuming 80% of the unplanted 102,750ha can be utilised, a ballpark planting cost of RM10,000 per hectare, EHP may need to fork out RM1.03 billion or RM171.3 million each year for six years.

Politically, Felda’s acquisition of EHP could have wide-ranging repercussions. At the recent Umno General Assembly, Maran Umno deputy chief Datuk Shahaniza Shamsuddin highlighted Felda settlers’ dissatisfaction over delayed payments that at times extended up to six weeks.

Noting there are 54 parliamentary constituencies with Felda settlers in this country, Shahaniza raised the possibility the opposition could capitalise on Felda settlers’ grievances to win the 23 seats needed to secure a simple majority in Parliament.

Only time and good management will determine whether EHP is a high flyer or a wingless raptor.