Our  site  visit  to  Felda  Global  Ventures’  Pontian  United  and  Felda Sahabat estates in Lahad Datu, Sabah,  proved  useful in helping us  get first-hand knowledge of its plantation  operations.  Having witnessed  the group’s serious efforts in improving operational efficiency at its estates by  rehabilitating  its  old  trees  and  reaping  the  low-hanging  fruit,  we expect its yields to improve in the next few years.

• Pontian United and Felda Sahabat site visit.  Last week, Felda Global Ventures  (Felda  Global)  brought  some  analysts  and  fund managers to Lahad  Datu,  Sabah,  to  visit  its  newly-acquired  Pontian  United Plantations  (PUP)  estates  as well as  its  Sahabat estates.  The two-day visit  comprised  visits to plantation estates,  a  refinery,  a  kernel crushing plant, a biomass plant, bulking installations and a jetty.
• Management  serious  on  improving  operational  efficiency.  Overall, we  believe  the  site  visit  helped  us  get  first-hand  knowledge  of  Felda Global‟s plantation operations from the on-the-ground teams at PUP and Sahabat.  Having  witnessed  the  group‟s  earnest  efforts  in  improving operational  efficiency  at  its  estates  by  rehabilitating  its  old  trees  and reaping the low-hanging fruit, we expect its yields to improve  in  the next few years.
• No changes to our forecasts. We maintain our CPO price assumptions of  MYR2,700/tonne  for  FY14  and  MYR2,900/tonne  for  FY15.  Although Felda  Global‟s  fresh  fruit  bunches  (FFB)  production  YTD  to  February was  down 9.9% y-o-y, we are leaving  our  FY14  FFB growth forecasts of 1-2%  unchanged  for  now,  given  management‟s  expectations  of production recovering strongly in 2H14.
• Maintain  BUY. We maintain our BUY recommendation on Felda Global and  our  SOP-based  FV  of  MYR5.00,  based  on  an  unchanged  18x CY14F target P/E for its plantation division (subsidiaries and associates) and  a  MYR5.49  FV  for  MSM  Malaysia  Holdings  (MSM  MK,  BUY). We expect  the  group‟s  acquisition  of  a  51%  stake  in  Felda  Holdings  Bhd (FHB)  (completed  at  end-2013)  to  boost  its  earnings  by  at  least  10%, while  improving  operational  efficiency.  This  will  give  Felda  Global complete control  over the entire plantation value chain  –  from  plantation estates  to  mills  and  refineries.  We  expect  to  see  this  improvement coming through from FY14 onwards.

Site Visit To Lahad Datu
Last week,  Felda Global  brought some analysts and fund managers to Lahad Datu, Sabah,  to  visit  its  newly-acquired  Pontian  United  estates  as  well  as  its  Sahabat estates.  The two-day visit comprised  visits to plantation estates,  a  refinery,  a  kernel crushing plant, a biomass plant, bulking installations and a jetty.  

On the first day, we visited Felda Global‟s newly-acquired Pontian United Plantations (PUP), where we saw a  demonstration of harvesting on  the estate,  as well as visited a  90-tonne  per  hour  (t/hr)  palm  oil  mill  and  stone  quarry  operations.  In  Oct  2013, Felda  Global  completed  its  acquisition  of  PUP,  which  has  15,678ha  of  plantation landbank  (13,091ha planted, 12,370ha mature)  in Lahad Datu, Sabah and 509ha in Kukup, Johor.

We  were  impressed  with  the  estate,  which  is  clearly  well-managed  given  its  neat surroundings,  efficient  operating  systems  and  decent  yields.  The  average  age  of PUP‟s trees is 15 years, while FFB yield in 2013 was 23.35 tonnes per ha (t/ha). PUP has a strict replanting schedule, replanting about 5% of its mature  areas every year. Between  FY14  and  FY16,  PUP  intends  to  replant  about  150-200ha  per  year, accelerating  to  600-1,200ha/year  in  FY17-19,  and  to  1,400-1,600ha/year  in  the following three years.  

According to  the  management,  the  PUP  estate  has not experienced any significant weather disruptions so far, as rainfall  has been reaching  a minimum 2,500-2,600mm per year.  Fresh fruit bunches (FFB)  production in the first two months of 2014  stood at  48,049  tonnes,  representing  about  16.6%  of  FY13  production,  and  in  line  with management‟s  budgeted  target  for  the  year  of  290,000  tonnes  (or  an  FFB  yield  of 24.66 tonne/ha). This is also in line with our projections for PUP‟s contribution. 

PUP has one 90t/hr  CPO  mill, which translates to a capacity of 540,000 tonnes of FFB per year. PUP generally acquires external FFB to maximise utilisation of its CPO mill,  but  the  external  FFB  volume  has  been  declining  over  the  years  due  to intensifying competition from  nearby mills. As PUP‟s landbank is  not too close to the main  road  –  about 80km from Lahad Datu town  –  CPO mills which are closer to the main road have the upper hand in terms of cheaper transportation costs. As such, the utilisation rate at PUP‟s CPO mill is expected to remain at the present  57-58% levels in the near term. However, the mill‟s  oil extraction rate (OER) is expected to be more stable given lower use of outside crop, with  the fruits processed  mainly  coming from PUP‟s  own  estate,  which  ensures  more  reliable  quality.  The  management  expects OER to improve to 21-22% in FY14, from 20-21% over the last few years. 

PUP‟s  2013  FFB  production cost  is  estimated at MYR280/tonne,  and management expects  this  to  be  maintained  this  year.  This  translates  into  a  CPO  cost  of approximately  MYR1,300-1,400/tonne  of  CPO,  which  is  in  line  with  industry standards for estates with a similar age profile.  We believe it is possible for PUP‟s production  cost  to  come  down  further,  as  more  operational  synergies  with  Felda Global  emerge, and in light of its improving FFB yields.  PUP now sells all its CPO to Felda  Global,  which  we  believe  could  lead  to  more  operational  synergies  in  the future.

Source: RHB