• According to press reports, Felda plans to take back the land it is leasing to FGV Holdings. On the compensation of the land with the termination of the lease, Datuk Seri Idris Jusoh, who is Felda’s chairman, said that it has not been discussed in detail.
• To lease the land, FGV pays RM243.8mil cash and 15% of plantation profits attributed to the land, to Felda annually. FGV paid land lease payments of RM298.7mil in FY18 and RM248.7mil in FY19. FGV also pays for the replanting of the land every year.
• There are several implications here. First, if Felda takes back the land, which is leased to FGV, we are unsure if Perspective Lane would still be interested to inject its plantation assets into FGV.  Second, FGV’s total landbank in Malaysia and Indonesia may drop to about 55,000ha to 60,000ha from more than 400,0000ha. According to FGV’s Annual Report 2016, FGV leases about 362,747ha of land from Felda. The leased land accounts for a third of FGV’s FFB processed.
• Third, it is uncertain how much compensation FGV would receive from Felda. According to the land lease agreement, the compensation is partly determined by the profit per mature area and the size of the land. According to FGV’s balance sheet, the land lease agreement liability stood at RM4.3bil as at end-December 2019.
• If Felda wants to terminate the land lease, it has to give an 18-month notice to FGV. After that, the compensation amount would be calculated. Then, the leased assets would be transferred back to Felda.
• Fourth, FGV may be flushed with cash if Felda terminates the land lease and pays the compensation. The group would be able to look for investment opportunities.
• As there are too many uncertainties currently, we maintain our HOLD recommendation on FGV with a fair value of RM1.14/share.

Source: AmInvest Research - 19 Oct 2020