Saturday, 31 December 2016
Analysts negative on Felda deal
Higher loss: Eagle High saw its net loss widen to RM100mil in its nine months ended Sept 30, 2016 from RM27.4mil last year.
They have raised doubts on some issues including Eagle High’s steep market price valuations and the quality of its asset holdings
FELDA’S acquisition of loss-making Indonesian planter PT Eagle High Plantations TBK has not gone down well despite the government-linked agency stressing its logics for the US$505.4mil (RM2.26bil) deal.
While Felda has defended saying that the Eagle High deal is good as it will create new businesses and synergies, analysts have raised doubts on a number of issues ranging from Eagle High’s steep market price valuations to the quality of its asset holdings.
Jakarta-listed Eagle High is one of Indonesia’s largest plantation companies which is 74.07% owned by PT Rajawali Group led by Indonesian tycoon Tan Sri Peter Sondakh.
Analysts are generally opposing to Eagle High purchase by Felda’s unit FIC Properties Sdn Bhd which holds no viability and potential benefits for Felda Group in the immediate future.
It is also believed that the board members of Felda’s listed entity, Felda Global Ventures Holdings Bhd (FGV), has rejected Felda’s Eagle High deal.
Back in June last year, FGV had proposed to acquire the same 37% stake for US$680mil (RM3.04bil). But later on, FGV is said to have backed out of the deal due to its stretched balance sheet and depleting cash reserves, given that it has already undertaken a spree of multibillion ringgit acquisitions prior to the Eagle High proposal.
This time round, however, Felda is expected to raise funds for Eagle High acquisition via a mix of loans and sukuk issuance.
Sources indicate that about 50% of the acquisition is believed to be financed through a loan with a major European banking group while the remaining funds will be raised through a sukuk issuance that will come with a government guarantee.
The announcement could be made as early as next month, adds the source.
Debt burden fears
While Felda maintains the deal would be a standalone investment with its own financing, analysts described Eagle High purchase as a raw deal that will not improve the well-being of Felda’s 112,635 settlers and their families “especially not in a financial sense.”
The fear is Felda’s Eagle High deal and the debt it incurs may affect the group’s existing financial commitments towards settlers such as ongoing training programmes, replanting of settlers’ aging palm trees and smallholder engagement initiatives.
Under the proposed deal for Eagle High, Felda will be given access to 425,000ha of Indonesian land bank as well as Rajawali’s sugar business.
Felda had defended earlier saying that the deal will improve the group’s crop profile as the average age of Eagle High’s trees is seven years versus Felda’s 15 years.
There will be also be a lot of collaborations and cross selling between Felda and Eagle High creating potential new businesses and synergies for Felda Group in seedling, fertiliser, crude palm oil trading, downstream/oleo-chemical and potential entry to vast Indonesian market of 260 million people for Felda Group’s finished and consumer products.
However, an analyst with a bank-backed brokerage said: “The claim that Eagle High assets will improve Felda’s crop profile is misleading.”
Felda as an equity investor “for now” does not own the asset outright and cannot claim a share of the earnings, explains the analyst. “It is also not known whether Felda could get enough seats on Eagle High’s board to exert majority control, although management control is a possibility.”
Furthermore, the 37% stake will not bring immediate financial benefits or return on investment to Felda, says the analyst.
Felda will only be able to recoup some of the funds should Eagle High pay a dividend, which is unlikely, given Eagle High’s recent weak financial performance and constrained cashflows.”
Eagle High saw its net loss widen to RM100mil in its nine months ended Sept 30, 2016 from RM27.4mil last year due to weak fresh fruit bunches (FFB) production and sizeable interest expenses.
Revenue also dipped 22.5% to RM532.mil compared with RM685.8mil previously.
In the financial year ended Dec 31, 2015, the plantation company suffered a net loss of RM60mil on higher revenue of about RM900mil versus RM63.1mil net loss and RM765.7mil revenue a year earlier.
Another part of Eagle High deal that has drawn major criticism was that Felda is paying a too high premium over the market price of Eagle High shares, which some quarters claimed it to be as high as 173%.
Valuation issues
The share price of Eagle High may not reflect its true value and “share price is not the accepted valuation method when it comes to plantation company.”
Generally, the accepted valuation is enterprise value per ha, which is US$16,000 enterprise value per ha (ev/ha), based on what Felda paid for the 37% stake. This value compares favourably with recent transactions involving Indonesian palm oil companies.
For comparison, Kuala Lumpur Kepong Bhd’s recent final offer of US$15,500 ev/ha was rejected by MP Evans Group PLC’s board of directors.
MP Evans independent valuation had placed their valuation at US$17,300 ev/ha while MP Evans board had asked for valuation of US$24,000 ev/ha for the company.
This would mean that at US$505.4mil, Felda is purchasing Eagle High stake at US$16,000 ev/ha.
The MP Evans’ planted land is about 31,400ha while Eagle High’s planted area is about 125,000ha.
“So, Felda is purchasing land in access of four times the size of MP Evans at a lower ev/ha than MP Evans independent valuation.”
Analysts, meanwhile, says the Eagle High comparison with MP Evans is truly misleading as MP Evans’ estates have one of the highest yields among Indonesian planters.
Another point that the share price does not reflect the true valuation is because Eagle High shares are over 70% controlled by the Rajawali Group. It is also listed on the Jakarta stock exchange, which is often not as “liquid as Bursa Malaysia or the Singapore Exchange,” say analysts.
Therefore, Felda does not have to pay such high price, given Eagle High’s illiquid status, says analysts.
By almost all other measures, Felda has attached a large premium on its offer price relative to Eagle High’s fundamental metrics.
Eagle High’s price to book value is about 1.4 times (based 276 rupiah closing price on Wednesday) on the back of total liabilities of US$794mil and current cash pile of about US$90.3mil.
Another item that was factored into the Eagle High purchase price was that no other plantation of such large scale is available for sale, especially at the current valuation.
“This is the last opportunity for Felda or Malaysia or any other foreign parties to acquire an Indonesian company with massive land bank. The Indonesian government agrees to a one-time exception to this deal,” Felda says in its defense recently.
While this may be true, analysts claim that: “Eagle High’s 425,000ha land bank is actually fraught with problems.”
For example, about 56% of the land is still in very preliminary stage with regards to getting the permission to use it for agricultural purposes.
“In Indonesia, plots of land carry what is called ‘Ijin Lokasi’ (location permit). They have a legal expiration date, and often these permits are not converted into real plantation development rights.
“In its annual reports, Eagle High has not provided clarity on the permit status for its land and their convertibility into plantation land,” said a plantation industry expert based in Indonesia.
He adds that some 17,000ha of Eagle High land bank are peatland, which could potentially threaten the plantation company’s Roundtable on Sustainable Palm Oil (RSPO) certification chances.
For now, Eagle High is a non-certified RSPO member eventhough it had indicated its intention to achieve certification by this year. So far, none of Eagle High’s palm oil mills are RSPO-certified.
It is also worth noting that one of the conditions precedent in the original FGV-Eagle High deal was that Eagle High needs to get at least one of its mills to be RSPO-certified within one year of the deal.
However, it is believed that Eagle High had apparently waived this condition in the present Felda-Eagle High deal, among others, according to sources.
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