At  our  recent  Invest  Malaysia-Hong  Kong  conference,  Felda  Global  Ventures (FGV) met up with 12 fund managers. The group has plenty of M&A plans, ranging from bringing Felda Holdings under its wings to expansion in ASEAN and Africa. In its future ventures to the African continent, the company is looking to replicate the FELDA model at its Malaysian operations. FFB production is likely to be soft over  the  next  few  years  as  its  trees  age  and  its  replanting  programme  is  rolled out, but the group may start on a steady upward trajectory in 2015. Our fair value for FGV stands at RM4.75.  

Gaining  downstream  control.  FGV  has  huge  plans  to  utilize  its  IPO  proceeds, earmarking  it  for  upstream  and  downstream  acquisitions  and  construction  totaling RM3.8bn.  First  on  its  agenda  is  to  consolidate  49%-owned  associate  Felda  Holdings (FHB)  under  its  wings  over  the  next  12  months.  Although  this  does  not  necessarily mean a total buyout of Koperasi Permodalan Felda (KPF)'s entire 51% stake, FGV is looking to get hold of a sizeable stake from KPF in order to gain firm control on the mid- and down-stream focused FHB. This could be executed either through a share swap (ie KPF  sells  its  FHB  stake  in  return  for  FGV  shares)  or  by  cash.  FGV  currently  sells  its fresh  fruit  bunches  (FFBs)  to  FHB  for  milling  into  crude  palm  oil  (CPO)  before repurchasing the CPO and reselling them to FHB's refineries  for  further  value-adding. Indeed, this business structure can be simpler than what it currently is.

Extending  its  reach.  In  relation  to  its  upstream  expansion,  the  planter  is  currently  in talks to purchase land adjacent to its Kalimantan 42k ha JV land with Lembaga Tabung Haji.  It  is  also  on  the  lookout  to  buy  private  Malaysian  companies  with  2k-3k  ha  of planted  areas  that  are  already  supplying  FFBs  to  FHB's  mills.  Management  has ambitions to also extend beyond the borders of Malaysia and Indonesia, with Cambodia, Myanmar,  Vietnam  and  the  continent  of  Africa  in  mind.  While  expansion  is  good, whether the acquisitions will add value to the group will depend on: i) the price that FGV will be paying, ii) a thorough study on the suitability of these areas for planting, and iii) the company's familiarity in doing business in those countries.

Saying 'hello' to Africa.  FGV  aims  to  make  a  foray  into  the  African  continent  by replicating  the  FELDA  model  currently  practised  in  Malaysia.  African  settlers  will  be provided World  Bank  loans  to  buy  land,  seedling,  fertilizer  and  machinery.  Meanwhile, FGV  will  focus  on  the  downstream  side  of  value  chain  by  constructing  and  operating palm  oil  mills  and  refineries  in  the  region.  The  quality  of  FFBs  arriving  at  its  mills  can possibly be an issue initially due to the region's relatively poor infrastructure and little oil palm planting experience among the settlers.

Flooding  concerns.  FGV's 9MFY12 FFB production fell 9.7% y-o-y  amid  poor  output  across  the  country. The company's old trees and ongoing replanting programme would have also contributed to the y-o-y decline.  Estates in parts of Johor (including FGV's) are experiencing some flooding as a result of recent heavy rainfall, which made harvesting difficult. The company expects the floods to worsen in the near term before improving, forecasting for full-year production to be 7.0% short of 2011's. We expect production to decline by 8.9% this year before perking up by 1.5% next year.

A  more  productive  breed.  FGV  has  been  using  its  Yamgambi  seedlings  in  its  replanting  initiative  since 2002.  The  seedling  is  touted  to  produce  peak  FFB  yields  of  38  tonnes  per  ha  and  peak  oil  extraction  rates (OER)  of  28%.  Tree  stands  have  also  been  increased  to  more  than  136  trees  per  ha  at  its  replanted  slots from 110 trees prior to replanting. This will lift FFB yields moving forward. FGV's research subsidiary is self-sustaining  as  seedling  sales  and  sales  of  FFB  harvested  from  its  12k  ha  research  plot are  more  than sufficient to cover its research costs. The unit reported profits of more than RM90m in 2011.

RM4.75  FV. We  value  FGV  at  a  FV  of  RM4.75,  based  on  16.5x  FY13  plantation  earnings  and  13.5x  FY13 sugar  profits.  Our  expectations  are  for  FY12  earnings  to  decline  by  25.3%  before  rebounding  by  37.0%  in FY13 on the back of a production recovery and firmer prices. As FGV's replanting programme essentially replaces  old,  fruit-producing  trees  with  immature,  non-producing  trees,  its  FFB  production  should  go  on  a downtrend over the next few years. We believe that production will nonetheless turn the corner in 2015 and begin  to  experience  positive,  albeit  marginal,  growth  of  between  0.7%  and  3.0%  from  2015-2018  before further strengthening from 2019 onwards.

Source: OSK