The cabinet has agreed to terminate Federal Land Development Authority’s (Felda) land lease agreement (LLA) with FGV. However, there was no mention on the amount of compensation that Felda will need to pay FGV as a result of the LLA termination. In the event the LLA is terminated, FGV’s total land bank will be reduced significantly, while keeping all its 68 palm oil mills and 51% stake in MSM (as these are not under the LLA), which will in turn result in a change in business model (i.e. from a pure upstream plantation company to a palm oil mill processor). The latest development could be a prelude to an M&A. Maintain earnings forecast, SOP-derived TP of RM1.08 and HOLD rating on the stock for now, given the sketchy details thus far. Nevertheless, we believe near-term share price sentiment will be lifted arising from the latest development.

NEWSBREAK

Cabinet agrees to terminate Felda’s LLA with FGV. The Prime Minister’s Office (PMO) announced that the cabinet has agreed to terminate Federal Land Development Authority’s (Felda) land lease agreement (LLA) with FGV. However, there was no mention on the amount of compensation that Felda will need to pay FGV as a result of the LLA termination. According to news reports, the compensation could be in the region of RM3-4bn.

To recap, Felda leased circa 351,000 ha of plantation land to FGV through an LLA for 99 years (starting from 2012) in return for a fixed payment of RM248m p.a. and 15% of the operating profit from LLA land (see Figure #1).

HLIB’s VIEW

In the event the LLA is terminated… FGV will be compensated for 10 years in future profits if the LLA is terminated less than 8 years from the last replanting, and 5 years of future profits if the agreement is terminated more than 8 years from the land’s last replanting. FGV’s total land bank will be reduced significantly by circa 80% to 88,000 ha (based on our estimates), while keeping all its 68 palm oil mills and 51% stake in MSM (as these are not under the LLA). This will in turn result in a change in business model (i.e. from a pure upstream plantation company to a palm oil mill processor).

A prelude to M&A? The latest development could be a prelude to an M&A. Recall on 15 Oct 2020, FGV announced that it has received an expression of interest from Perpesctive Lane (M) Sdn Bhd (PLSB, a wholly-owned unit by Tan Sri Syed Mokhtar Albukhary’s privately-owned Restu Jernih Sdn Bhd), which expressed its interest to participate in FGV via an injection of plantation assets into FGV.

Forecast. Maintain, as details remain sketchy at this juncture.

Maintain HOLD; TP: RM1.08. We maintain our HOLD rating on FGV, with an unchanged SOP-derived TP of RM1.08 (see Figure #2), given the sketchy details provided thus far

Source: Hong Leong Investment Bank Research - 30 Oct 2020