• The Edge Markets reported that the Cabinet has agreed to the termination of Felda’s land lease agreement (LLA) with FGV Holdings. FGV leases 350,733ha of oil palm estates from Felda.

• However, the statement did not mention the compensation that Felda needs to pay FGV as a result of the termination of the LLA.

• In an official statement that was issued yesterday, FGV said that the compensation amount may range between RM3.5bil and RM4.3bil. FGV also said that it has not received a written notice from Felda in respect of the termination of the LLA yet.

• According to The Edge, a special task force led by Tan Sri Wahid Omar has identified several main issues that need to be addressed expediently including Felda’s unsustainable capital structure and whopping RM10.6bil debts. Felda is expected to be cash flow positive in year 2023F. The Cabinet has approved the issuance of a government guaranteed RM9.9bil sukuk to be issued by Felda.

• There are several issues here. First, Felda has debts of RM10.6bil and will be issuing a RM9.9bil sukuk.

• Second, FGV would have a significant war chest assuming it receives the compensation amount of RM3.5bil to RM4.3bil. The group can either look for new landbank, repay its borrowings or pay additional dividends. As at end-FY19, FGV had gross external borrowings of RM4.0bil and loans due to its ultimate shareholder of RM1.1bil.

• Recall that recently, Perspective Land Sdn Bhd proposed to inject its plantation assets into FGV in exchange for shares. Hence, there is a possibility that FGV may buy part of Perspective Lane’s plantation assets using cash instead of shares, if it receives the cash compensation from Felda.

• Third, the LLA only involves oil palm estates and not palm oil mills. Hence, FELDA may have to pay milling fees to FGV for the milling of FFB into CPO. We believe that FGV has about 68 palm oil mills. The land leased from Felda accounts for about a third of FGV’s FFB processed.

• Fourth, if the LLA is terminated, FGV’s own landbank would consist mainly of 55,297ha in Malaysia and 23,000ha in Indonesia (excluding the plantation joint venture with Lembaga Tabung Haji).

• We maintain HOLD on FGV with a fair value of RM1.14 per share.

Source: AmInvest Research - 30 Oct 2020