Felda Global Ventures Holdings (Subscribe)
Fair value: RM5.40

Investment Highlights

• Third largest oil palm operator in the world. FGVH is the third largest oil palm operator with total planted area of 323,587 hectares trailing Sime Darby and Golden Agri-Resources Ltd. Meanwhile, the Group is also the largest oil palm operator in Malaysia based on matured planted area. The Group is having 89% of mature oil palm tree in its tree profile and its Fresh Fruit Bunches (FFB) production in 2011 accounts about 5.5% market share in Malaysia.
• New business model. The Group has entered into FFB supply and CPO delivery agreement with Felda Holdings Berhad (FHB) to supply all FFB production to FHB and subsequently purchase substantial CPO from FHB effective from March 2012. We are positive on the new business model as it brings new revenue stream by chalking up profit from the spread between CPO selling and buying price instead of recognising FFB sales. We expect CPO sale to contribute more than 55% to the Group’s top line.
• Eye-catching sugar division. Following the acquisition of MSM Holdings, the largest sugar producer in Malaysia in 2010, the Group’s top line and profit before tax surged at 202% and 215% respectively in 2010. Sugar division of the Group has been historically eye-catching with revenue and profit before tax grew at 3-year CAGR of 25.83% and 28.76% respectively. We view the growing domestic sugar consumption would further propel the growth of its sugar division.
• Land Lease Agreement to gain full control of estate. The Group signed tenancy agreement in January 2012 to lease 355,864 hectares of land from FELDA for term of 99 years. The Group is bound to pay a lease payment of RM250mil and 15% of its plantations operating profits to FELDA. We view the lease agreement to benefit the Group as it allows the Group to gain full control of estate management.
• Replanting programme to rejuvenate aging tree profile. By having more than half of aging oil palm tree in tree profile, the Group is set to replant 15,000 hectares per annum from 2012 to 2015. We expect aging tree portion to decline from 54% in 2011 to 35% in 2015. However, we reckon the replanting programme would decrease FFB yield and FFB production from 2012 to 2015 and the replanting programme would only bear fruits from 2017 onwards.
• Expected turnaround in downstream business. The Group gained foothold in soybean and canola crushing and oleochemical downstream business through its subsidiary in Canada and United States. Pursuant to an agreement with the Group’s joint venture partner, Bunge ETGO, in December 2011, the Group is to recognize revenue from the tolling fees (provided optimal refining capacity is achieved) instead of sales and costs of selling soybean and canola products. We expect revenue from the division to be contracted in FY12 and stabilise in FY13 thereafter. However, we view this positively as the Group could minimise the losses from the exposure to soybean price risk and hence expect earnings turnaround in FY12 onwards and potentially write back c.RM69m impairment losses.
• Backed by cornerstone investors. FGVH’s IPO has attracted investment commitment from cornerstone investors namely EPF, PNB, Tabung Haji, global commodities group- Louis Dreyfus, Qatar Holdings, Hong Kong based insurance giant –AIA Group Ltd and press highlighted Malaysian tycoon Tan Sri Quek Leng Chan and Chua Ma Yu. This augurs well for the IPO response as it raises public confidence on the Group’s future prospect.

Key Risks

• Termination of land lease agreement.
• Earnings exposed to CPO price changes.

Recommendation

• Subscribe with target price of RM5.40. We peg FGVH valuation at 17.5x FY13 EPS which is in line with large-cap planters’ average PE in view of its status as plantation giant. FGVH shall provide best proxy for investors to have exposure in plantation sector.
• Our fair value also translates into potential upside of 19%. We reckon share price could go beyond our fair value with all of the frenzy on this mega IPO.

Background
Felda Global Ventures Holding Berhad (FGVH) is a global agricultural and agri-commodities company based in Malaysia, with operations across ten countries. FGVH was incorporated in Malaysia on 19 December 2007 and it is the third largest oil palm plantation operator in the world based on planted hectarage in 2011. The Group’s primary business activities are classified into three main segments: plantations business, downstream business and sugar business.

Plantation business
The Group has approximately 355,864 hectares of plantation estates in Malaysia under tenancy agreements with FELDA, the vast majority of which is devoted to the cultivation of oil palms, with a small amount used to cultivate rubber trees. FGVH has invested in Trurich, a joint venture that owns 42,000 hectares of oil palm plantations in East and Central Kalimantan, Indonesia, and acquired PT Citra Niaga, a company that owns 14,385 hectares of land in West Kalimantan, Indonesia for oil palm plantation development.

Downstream business
The Group produces soybean and canola products through its subsidiary, TRT-ETGO Inc, and soybean and canola business’ commercial operations are conducted through company joint venture. Through this joint venture, the Group has interests in palm oil refineries and downstream processing facilities in Malaysia, Indonesia, China, Turkey and South Africa, a facility for other oils and fats in Ohio, United States, and sales and marketing offices in France and Spain

Sugar business
Through the Group’s subsidiary, MSM Holdings, company produces a full range of refined sugar products for both the commercial and retail sectors. In 2011, FGVH was the largest refined sugar producer in Malaysia based on production volume of 958,377 MT of sugar products and an annual production capacity of over 1.1 million MT of sugar products.

Source: JF Apex Research - 8 June 2012