Initiating Coverage 4 June 2012 Felda Global Ventures Holdings Buy · 2012-06-04 · Felda Global...

PP13693/03/2013(032114)

Venturing into a new business model

Felda Global Ventures Holdings Bhd (FGVH) is on track to raise some RM9.9bn from its

listing, making it the world’s second largest IPO this year after Facebook. We initiate

coverage on FGVH with a BUY recommendation and TP of RM5.65. Our TP is based on

a PE of 16x pegged against FY12 EPS.

3rd

largest plantation operator globally

� FGVH is the third largest (by landbank) listed palm oil operator globally. In addition,

they have access to the largest crude palm oil (CPO) producer globally in the form of

Felda Holdings Bhd (FHB). FGVH’s business model will change substantially going

forward due to the land lease agreement (LLA) signed with Felda and the execution

of new commercial contracts with regards to CPO and soybean/canola.

Investment merits

� Room for yields to climb. FGVH’s fresh fruit bunches (FFB) yield/ha are above the

Malaysian Palm Oil Board (MPOB) average, but remain below other established

plantation companies such as IOI Corp and Genting Plantations. Assuming FGVH is

able to boost its yields from 19.9MT/ha to 22-23MT/ha in the next few years, this

will provide FGVH with the needed FFB production growth.

� Aggressive replanting program to drive age profile. FGVH is embarking on a

mission to reduce the maturity profile of its plantations by going on an expansive

replanting program. FGVH targets to replant 15,000 ha per year (about 4% of its

total land) and use better and more efficient materials from its R&D division to

improve yields.

� Hefty war chest to be used for potential acquisitions. Post listing, FGVH intends to

set aside around RM3bn to expand its business. This includes RM2.19bn for

acquisition of plantations assets and RM840m for the acquisition of downstream

assets.

� Potential partnerships with established companies. By looking for and entering JVs

with well-known industry players, FGVH is able to leverage on the knowledge and

expertise of these players to enhance their downstream operations.

Key risks

� Fluctuation of CPO prices.

� Profitability dependent on commercial contracts.

� Competition from Indonesian refiners.

� Reliance on foreign labour.

� Production may be affected by external factors.

� Exposed to foreign currency risk.

Valuation

� We initiate coverage on FGVH with a BUY recommendation. We value FGVH at

RM5.65 based on 16x PE pegged against FY12 EPS of 35.3 sen. Our PE is based on

the average of IOI Corp’s and KL Kepong’s calendarised PE (due to different year

ends). Our TP implies a FY12 P/B of 3.4x and dividend yield of 3.1%.

Initiating Coverage 4 June 2012

Felda Global Ventures Holdings PLANTATION

Buy Bloomberg Ticker: FGVH MK

Key data

IPO price (RM) 4.55

Listing sought Main market

Closing date of application 13 Jun 12

Listing date 28 Jun 12

Market cap @ IPO price (RM m) 16,599

Issued shares (m) 3,648

12-month upside potential

Target price 5.65

IPO price 4.55

Capital upside (%) 24.2

Net dividends (%) 3.9

Total return (%) 28.1

IPO offer (m shares)

Public 73.0

Eligible directors & employees 200.6

Institutional Offering 1,915.3

Major shareholders (Post-IPO) %

Felda 40.0

Analyst

Team Coverage

[email protected]

+603 2089 2986

Felda Global Ventures Holdings | Venturing into a new business model | 4 June 2012 2

SNAPSHOT OF FINANCIAL AND VALUATION METRICS

Figure 1 : Key financial data

FYE 31 Dec FY11 FY12F FY13F FY14F

Revenue (RM m) 7,474.8 12,249.9 11,289.7 11,501.5

EBITDA (RM m) 2,128.8 1,946.5 1,597.2 1,636.7

EBIT (RM m) 2,005.2 1,824.2 1,453.3 1,471.2

Pretax profit (RM) 1,372.0 1,772.8 1,472.7 1,605.7

Reported net profit (RM m) 942.2 1,286.6 1,004.5 1,095.2

Adj net profit (RM m) 942.2 1,286.6 1,004.5 1,095.2

EPS (sen) 25.8 35.3 27.5 30.0

Adj EPS (sen) 25.8 35.3 27.5 30.0

ECM / Consensus (%)

EPS growth (%) 37% -22% 9%

P/E (x) 17.6 12.9 16.5 15.2

ROE (%) 17.2 21.0 15.2 15.3

Net DPS (sen) 17.6 13.8 15.0

Dividend yield (%) 3.9 3.0 3.3

BVPS (RM) 1.50 1.68 1.82 1.97

P/BV (x) 3.0 2.7 2.5 2.3

Source: ECM Libra

Figure 2 : Sector comparison

EPS Growth (%) P/E (x) P/BV (x) ROE (%)

Net Dividend

Yield (%)

Company Call

Target

price

(RM)

Share

price

(RM)

Mkt Cap

(RM m) FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13

Felda Global Ventures Buy 5.65 4.55 16,599.1 36.6 -21.9 12.9 16.5 2.7 2.5 21.0 15.2 3.9 3.1

Sime Darby Hold 9.32 9.67 58,111.5 12.1 4.1 14.1 13.6 2.2 2.1 16.4 15.7 3.5 3.7

IOI Corp Hold 4.74 5.19 33,200.1 13.7 6.5 15.3 14.3 2.6 2.4 16.6 16.3 3.3 3.5

KL Kepong Hold 18.53 22.24 23,741.3 -7.8 0.7 19.5 19.4 3.1 2.9 16.5 15.6 3.1 3.1

Genting Plantations Hold 8.78 9.30 7,057.3 4.3 -11.1 15.3 17.2 2.0 1.8 13.5 10.9 1.3 1.2

Average (ex-FGVH) 5.6 0.0 16.1 16.1 2.5 2.3 15.8 14.6 2.8 2.9

Source: ECM Libra, Bloomberg Share price date: 1 June 2012


IPO DETAILS

Figure 3 : IPO details

% million shares

Enlarged Share Capital 3,648.2

Existing shares offered 33.1 1,208.9

New shares offered 26.9 980.0

Institutional Offering

MITI 11.5 419.5

Other Malaysian institutions & investors 41.1 1,495.8

Total 52.5 1,915.3

Retail Offering

Malaysian public 2.0 73.0

Employees, settlers 5.5 200.6

Total 7.5 273.6

Listing Price RM4.55/share

Source: Prospectus

Figure 4 : Utilisation of Proceeds

RM m %

Acquisition of oils & fats, manufacturing & logistics businesses 840 18.9

Acquisition of plantation assets 2,190 49.1

Construction/acquisition of mills/refineries 780 17.5

Loan repayment 260 5.8

Capital expenditure 100 2.2

Working capital 129 2.9

Listing expenses 160 3.6

Total Proceeds 4,459 100

Source: Prospectus


COMPANY OVERVIEW

History and background

The Federal Land Development Authority (Felda) was established on 1 Jul 1956 under the Land

Development Ordinance (Land Development Act), 1956. Felda’s historical mission has been to

carry out land development and settlement in new areas with the objective of creating farming

communities with economically viable agricultural holdings. By 1990, a total of 853,313 ha had

been brought under cultivation through Felda’s operations.

On 19 Dec 2007, Felda Global Ventures Holdings (FGVH) was incorporated as a wholly-owned

subsidiary to operate as Felda’s investment arm for its overseas investments, primarily North

America. However since then, FGVH has ventured into upstream plantations in Malaysia and

Indonesia, downstream palm oil and sugar.

Figure 5 : Milestones of FGVH

Year Milestone

2007 Incorporated as a wholly owned subsidiary of Felda

2008 Acquired FGV North America from Felda (including investments in TRT Holdings)

2009 Acquired 49% stake in FHB from Felda

Acquired 50% stake in Felda IFFCO from FHB

Acquired 50% stake in Trurich from Lembaga Tabung Haji

2010 Fully acquired MSM

Acquired 50% stake in KGFP

Acquired 20% stake in Tradewinds

Acquired 5,797 ha of sugar cane plantations from PPB Group Bhd

2011 MSM was listed on Bursa Malaysia’s Main Market

Acquired 49% stake in Bunge ETGO

2012 New land lease agreement between Felda and FGVH comes into effect

Enters FFB/CPO agreement with F Palm Industries

Acquired a 95% stake in PT Citra Niaga, which owns 14,000 ha in Indonesia

Source: Company

Group structure

Figure 6 : Group corporate structure

Source: Company


Business Segments

FGVH primarily operates in 3 business segments:

� Plantations

� Downstream

� Sugar

Figure 7 : Revenue breakdown (2011) Figure 8 : Operating profit breakdown (2011)

Source: Company Source: Company

Plantations

FGVH made its foray into the plantations segment in 2009 when it acquired a 49% stake in FHB

from Felda. FHB is the largest CPO producer in the world in terms of CPO volume produced. In

2011, FHB sourced 16.1m MT of FFB and produced 3.3m MT of CPO. Besides sourcing FFB from

Felda leased lands, FHB’s other main sources of FFB are Felda settlers, third parties and its

subsidiary F Agricultural. FFB produced on Felda leased land accounted for 31.9% of FHB’s

feedstock. FHB has a milling capacity of 20.4m MT, spread over 70 mills in Malaysia.

Figure 9 : FGV Plantations structure Figure 10 : FHB’s sources of FFB (2011)


For FGVH, the real kicker came in November 2011, when FGVH signed a Land Lease Agreement

(LLA) with Felda to lease 355,864 ha of plantation land. 67% of the land is located within

Peninsula Malaysia, while 31% and 2% of the land is located within Sabah and Sarawak,

respectively. The terms of this lease begin from 1 Jan 2012 for a period of 99 years. Based on the

terms of this lease, FGVH must pay Felda RM248.5m (or RM698.24/ha) pa together with a fixed

percentage of FGVH’s plantations operating profit attributable to the lands. The annual fixed

lease amount of RM248.5m is subject to review every 20 years. We feel that the land lease price

is cheap. To put things into perspective, we estimate that Boustead REIT leases out its 19,000 ha

plantation land for RM69m pa, roughly translating into RM3,500/ha.


In addition to the LLA, FGVH also signed an agreement with FHB on 22 Feb 2012, whereby F Palm

Industries (F Palm), a subsidiary of FHB, shall buy all the FFB produced by FGVH on Felda leased

lands. Subsequently, FGVH shall buy nearly all the CPO that F Palm produces (which is not used

by FHB’s subsidiary Delima Oil Products for example) at a price based on MPOB spot prices. This

agreement is valid for 99 years, commencing on 1 Mar 2012. With this agreement, FGVH will no

longer recognize FFB sales, and going forward they will recognize sales of CPO which they sell on

behalf of F Palm. Therefore their contract with F Palm shall turn into a tolling agreement.

Figure 11 : Maturity profile (Malaysia) Figure 12 : Maturity profile (Indonesia)


Besides this, FGVH also has exposure to plantations in Indonesia through Trurich, its 50:50 JV

with Lembaga Tabung Haji. Trurich has access to 42,000 ha of plantation land located in

Kalimantan. The maturity profile of this land is young, as 21% is immature while 66% remains

unplanted. FGVH also has a 95% stake in PT Citra Niaga, which owns 14,385 ha of plantation land

in Kalimantan. This land remains unplanted.

FGVH is also involved in the production of rubber in the form of cup lumps. Out of the 355,864 ha

Felda leased land, 10,308 ha is allocated to rubber plantations located in Peninsula Malaysia. The

maturity profile for their rubber plantations is 45% immature, 12% mature and 43% old. Revenue

from the rubber segment equaled to RM89.9m in 2011, representing 1.2% of FVGH’s FY11

revenue.

Downstream

FGVH’s downstream operations consist of (i) soybeans and canola products, and (ii) oleochemical

products. FGVH, through its subsidiary TRT-ETGO, traditionally produces soybean and canola

products by crushing and refining soybeans and canola seeds at its crushing and refining facility

in Canada. The primary products produced are RBD soy and canola oils, degummed soy & canola

oils, and soy and canola meals.

In December 2011, FGVH’s JV Bunge ETGO (Partnership) signed a tolling agreement with TRT-

ETGO. This agreement would mean that TRT-ETGO would crush canola seeds and soybeans into

value-added products for the Partnership. Prior to this agreement, TRT-ETGO would purchase the

required raw materials from third parties, process it, and then sell it. Therefore FGVH will no

longer recognize the revenues and costs related to it, and only receive a tolling fee. The

agreement is indefinite, but either party may terminate it as of 9 Dec 2014. We opine that this

agreement is positive for its soybeans and canola segment. Although revenue contribution would

be reduced, potential losses would be limited, provided optimal refining capacity levels are

attained.


Figure 13 : Downstream structure

Source: Company

FGVH, through its subsidiary TRT Holdings, also produces oleochemicals such as fatty acids and

glycerin, from tallow, lauric oils and vegetable oils at their facility in Massachusetts. Fatty acids

are used in the production of food, personal care, products, cosmetics, pharmaceuticals, rubber

& textile products, while glycerin is widely used in pharmaceutical formulations, including as food

and beverage additives and as an intermediary in the production of soaps and other

pharmaceuticals. TRT Holdings’ fatty acids and glycerin are sold primarily to manufacturers of

consumer and industrial goods in North America.

Felda IFFCO is a JV between FGVH and IFFCO Group, a mass market consumer goods

manufacturer and marketer based in the United Arab Emirates. Through this JV, FGVH has

interests in palm oil refineries and downstream processing facilities in Malaysia, Indonesia,

China, Turkey and South Africa.

Sugar

Recall in our MSM IPO Note, FGVH acquired MSM Malaysia Holdings (MSM) and its related

businesses from PPB Group for RM1.25bn in January 2010. According to FGVH’s prospectus,

MSM is Malaysia’s largest sugar producer, producing 958,377MT of sugar in 2011, which

accounted for 57% of domestic refined sugar production. The main brands under MSM are Gula

Prai and Gula Perlis, while key customers consist of F&N Beverages Sdn Bhd, Permanis Sdn Bhd

(PepsiCo) and Nestle Manufacturing (M) Sdn Bhd.

Figure 14 : Gula Prai Figure 15 : Gula Perlis

Source: Google Images Source: KGFP website

In addition to MSM, FGVH also has a 20% stake in Tradewinds Bhd. Tradewinds’ market share of

the local refined sugar scene is 43%, and together with MSM account for all the refined sugar

production in the country (duopoly).


INVESTMENT MERITS

Room for yields to climb

FGVH’s FFB yield/ha between 2009-2011 have been 18.8-19.9MT/ha, above the MPOB

benchmark of 18.0-19.7MT/ha, but way below the average of the other companies within our

coverage of 22.2-23.0MT/ha. This means that with efficient plantation management efforts, it

would not be unreasonable to expect FGVH’s yields to reach levels of 22.0-23.0MT/ha in the

future.

Figure 16 : Yield comparison

Source: ECM Libra, Bloomberg

Aggressive replanting program to drive age profile

FGVH is about to embark on an aggressive replanting program, that would provide much needed

rejuvenation to its aging tree profile. While historically FGVH had been seen to be reactive when

it came to replanting old trees, since 2007 FGVH had been ramping up their replanting

operations. FGVH intends to replant about 15,000 ha pa, which would help lower the average

age of their plantation landbank. FGVH believes that the use of higher yielding materials (sourced

from their R&D activities), combined with improved agronomic practices can improve the

production yields of replanted areas by 20-30%.

Figure 17 : Replanting schedule

Source: ECM Libra, Bloomberg


Hefty war chest to be used for potential acquisitions

With the funds raised from the IPO, FGVH plans to set aside RM840m for the purpose of

acquisition of oils & fats, manufacturing & logistics businesses, and RM2.19bn for the acquisition

of plantation assets. We expect FGVH to venture into countries such as Indonesia and Africa to

expand their plantation assets, as these countries are able to provide soil and climate conditions

similar of those to Malaysia. On the downstream front, we expect FGVH to expand into fast

growing economies such as China and India.

Potential partnerships with established companies

As reported in the local news wires, FGVH has been on the lookout for potential partnerships

with well-known players to form a partnership with in the downstream sector. This would allow

FGVH to leverage on the knowledge and expertise of these players through JVs to further

enhance their downstream operations.

For example, when FGVH operated in the soybean & canola business in Canada, they

experienced losses due to the low utilization rates. However, after the tolling agreement, FGVH is

able to leverage on the Bunge’s expertise in procuring and marketing their products.

INDUSTRY OUTLOOK

Demand for food will continue to grow

According to Frost & Sullivan, world population in 2010 was approximately 6.8bn, growing 28%

from 5.3bn in 1990. Observations showed that developing countries had higher population

growth rates as compared to developed countries. Over the years, developing countries had

been spending more on food products, as increasing disposable income causes changes in their

dietary intake, shifting from staple food products such as cereals to livestock and vegetables. The

increase in world population and the increasing desire to consume better diets will drive demand

for palm oil in the future. Frost & Sullivan estimates that 3-year palm oil supply CAGR will be

5.9%, while 3-year demand CAGR will be 4.8%.

Figure 18 : Palm oil supply trend Figure 19 : Palm oil demand trend

Source: Prospectus Source: Prospectus

CPO prices to remain steady

We attribute the recent selldown of CPO futures causing prices to reach RM3,100/MT, to the

negative sentiment in the Eurozone. We believe that fundamentals remain on track, and that

CPO prices will strengthen in the near future. The recent drought in South America has caused

soybean supplies to come in below expectations, causing production forecasts to drop as much

as 15% in recent months than originally expected. Coupled with potential reductions in US

soybean plantings and an aggressive Chinese buying policy, we expect CPO prices to be sustained

by the strong soybean prices. Our CPO price assumption is RM3,200/MT for 2012 and

RM2,800/MT in 2013.


Figure 20 : Malaysian CPO spot prices Figure 21 : Rotterdam oil seed prices

Avg prices: RM2,750/mt

Source: Bloomberg, ECM Libra Source: Bloomberg, ECM Libra

RISK FACTORS

� Profitability dependent on commercial contracts – FGVH’s profitability is dependent on its

agreements (LLA, commercial contracts, etc.). Any change in the agreements would affect

FGVH’s profits by varying amounts.

� Fluctuation of CPO prices – The plantation segment is FGVH’s largest contributor to

operating profit. Fluctuations in CPO selling prices will affect the segment’s profitability.

� Competition from Indonesian refiners – Recently, Indonesia adjusted their palm oil export

tax structure. This gave Indonesian refiners greater bargaining power when procuring CPO as

exporting CPO became expensive. Additionally, the lower export tax for refined products

allowed Indonesian refiners to sell cheaper products compared to their Malaysian

counterparts. This caused two problems for Malaysian refiners. Firstly, they were unable to

obtain sufficient CPO from Indonesia to process at their refineries, causing low utilization

rates, thus a reduction in profits. Secondly, Malaysian refined products became more

expensive than Indonesian products causing Malaysian players to cut prices and face lower

margins.

� Reliance on foreign labour – Plantation companies in Malaysia significantly rely on foreign

workers (primarily from Indonesia) to work on their plantations. FGVH currently employs

some 25,000 foreign estate workers, representing 84% of their estate workforce and 73% of

their total workforce. We believe this is due to locals preferring to work in urban areas, away

from rural areas, due to the perceived advantageous standard of living. Should any difficulty

arise from obtaining permits for foreign workers, or if the Indonesian authorities were to

impose a moratorium on Indonesian workers in Malaysia, this would affect FGVH’s ability to

harvest FFB at an optimum level.

� Production may be affected by external factors – Palm oil, just like any other agricultural

commodity, is reliant on weather conditions to produce the ideal amount of FFB. Malaysia is

susceptible to adverse weather conditions such as El Nino and La Nina, which may affect the

FFB output from FGVH’s estates, thus affecting profits.

� Exposed to foreign currency risk – A substantial portion of FGVH’s transactions are

denominated in USD. Should the RM appreciate against the USD, this will affect FGVH’s

reported financial performance.


VALUATION & RECOMMENDATION

We initiate coverage on FGVH with a BUY recommendation. We value FGVH at RM5.65 based on

16x PE pegged against FY12 EPS of 35.3 sen. Our PE is based on the average of IOI Corp’s and KL

Kepong’s calendarised PE. Our TP implies a FY12 P/B of 3.4x and dividend yield of 3.1%.

Key assumptions

Figure 22 : Key assumptions

FY2012F FY2013F FY2014F

CPO price (RM/mt) 3,221 2,800 2,800

FFB yield (mt/ha) 20.40 20.90 21.40

Source: ECM Libra

Sensitivity analysis

Figure 23 : EPS sensitivity Figure 24 : TP sensitivity (FY12)

FGVH FY12 FY13 FY14

CPO price assumption (RM) 3,221 2,800 2,800

EPS forecast (sen)

Change in EPS for RM100

increase in CPO prices 5% 7% 7%

CPO price assumption TP (RM) Change (%)

2,800 4.37 (23)

2,900 4.67 (17)

3,000 4.98 (12)

3,100 5.28 (6)

3,221 5.65 -

3,300 5.89 4

3,400 6.18 10

Source: ECM Libra Source: ECM Libra


APPENDIX 1

Figure 25 : Upstream production process

Source: Company

APPENDIX 2

Figure 26 : Downstream production process

Source: Company


DISCLOSURE & DISCLAIMER

Stock rating definitions

Strong buy - High conviction buy with expected 12-month total return (including dividends) of 30% or more

Buy - Expected 12-month total return of 15% or more

Hold - Expected 12-month total return between -15% and 15%

Sell - Expected 12-month total return of -15% or less

Trading buy - Expected 6-month total return of 15% or more arising from positive newsflow. However, upside may not be

sustainable.

Sector rating definitions

Overweight - Industry expected to outperform the market over the next 12 months

Neutral - Industry expected to perform in-line with the market over the next 12 months

Underweight - Industry expected to underperform the market over the next 12 months

Disclaimer

This report is for information purposes only and general in nature. The information contained in this report is based on data and

obtained from sources believed to be reliable. However, the data and/or sources have not been independently verified and as

such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information

or opinions in this report. Accordingly, neither we nor any of our related companies and associates nor persons related to us

accept any liability whatsoever for any direct, indirect or consequential losses (including loss of profits) or damages that may

arise from the use of or reliance on the information or opinions in this publication. Any information, opinions or

recommendations contained herein are subject to change at any time without prior notice.

It is not possible to have regard to the specific investment objectives, the financial situation and the particular needs of each

person who may receive or read this report. As such, investors should seek financial, legal and other advice regarding the

appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.

Under no circumstances should this report be considered as an offer to sell or a solicitation of an offer to buy any securities

referred to herein. This company and its related companies, their associates, directors, connected parties and/or employees

may, from time to time, own, have positions or be materially interested in any securities mentioned herein or any securities

related thereto, and may further deal with such securities and provide advisory, investment or other services for any company

or entity mentioned in this report. In reviewing this report, investors should be aware that any or all of the foregoing, among

other things, may give rise to real or potential conflict of interests.

Published & printed by:

ECM Libra Capital Sdn Bhd (579116-A)

2nd Floor, West Wing, Bangunan ECM Libra

No. 8 Jalan Damansara Endah

Damansara Heights

50490 Kuala Lumpur

Tel: (603) 2089 1888

Fax: (603) 2096 1868

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