Termination of LLA

• FGV will follow the procedures outlined in the LLA to start the process of termination once it receives an official letter from Felda and to determine the compensation due to FGV, which could take 18 months to complete.
• The earnings impact to FGV could be minimal, depending on whether Felda decides ultimately to sell its FFB produced to FGV or otherwise. FGV’s other plantation integrated value chain in the midstream and downstream businesses will remain uninterrupted by the LLA termination exercise.
• No changes to FGV 2020-22E earnings in this report, as we wait for further clarification by FGV. Nevertheless, we believe in the short term, the LLA news and uncertainties surrounding FGV’s operations will be negative to the Group, thus we downgrade FGV to our SELL rating from HOLD previously with a new TP at RM0.99 (from RM1.06 previously).

Cabinet Agrees to Termination of Felda’s LLA With FGV

According to Datuk Sri Mustapa Mohamed, Minister in the Prime Minister’s Department (Economy), the Cabinet has agreed to the recommendation for the termination of Felda’s Land Leased Agreement (LLA) with FGV Holdings (FGV). Felda plans to restructure its debts, increase the core income from its plantation lands and increase the independence of settlers. The Cabinet has also approved Felda’s proposal to issue a governmentguaranteed sukuk worth RM9.9bn to finance its restructuring plans. The LLA, which was signed on 1 November 2011, specifies that the assets involved are estates that do not include land cultivated by existing Felda settlers and do not include FGV’s palm-oil mills. Currently, FGV manages c. 439,725 ha of plantation land (Malaysia: 417,147 ha; and Indonesia: 22,578 ha), produces about 3m MT of CPO annually and owns 64 palm-oil mills. Of this plantation landbank c. 350,733 ha is controlled via the LLA with Felda (which owns a 33.66% stake in FGV Holdings). FGV’s total landbank will shrink by c. 80% after the termination of the LLA.

LLA Agreement Between FGV and Felda Includes...

Under the LLA between Felda and FGV, Felda was to receive a payment of RM248m (based on the hectarage) plus 15% of the operating profit from LLA land yearly. Since 2016, there was a drop in LLA fixed payments to Felda due to adjustments in hectarage leased (refer to Fig 1) because of several reasons, which include land acquisition by Felda, surrender of land to Felda for the purpose of mining, overlapping of mill land and reconciliation process between land title and the Department of Survey and Mapping Malaysia (JUPEM)

Source: Affin Hwang Research - 30 Oct 2020