Buy (Maintained) Felda Global Ventures (FGV MK) Sights And Sounds Of Lahad Datu

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1 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Vol m Company Update, Buy (Maintained) Agriculture - Plantation Target Price: MYR5.00 Market Cap: USD5,132m Price: MYR4.54 Sights And Sounds Of Lahad Datu Macro Risks Growth Value Felda Global Ventures Holdings (FGV MK) Price Close Relative to FTSE Bursa Malaysia KLCI Index (RHS) 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 Source: Bloomberg Avg Turnover (MYR/USD) m/1.80m Cons. Upside (%) -9.3 Upside (%) wk Price low/high (MYR) Free float (%) 40 Shareholders (%) Federal Land Development 40.0 Territory Lembaga Tabung Haji 7.5 Kumpulan Wang Persaraan (Diperbadankan) Shariah compliant Hoe Lee Leng hoe.lee.leng@rhbgroup.com 6.3 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. Forecasts and Valuations Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Total turnover (MYRm) 7,453 12,886 12,568 15,074 16,037 Reported net profit (MYRm) 1, , Recurring net profit (MYRm) 1, , Recurring net profit growth (%) na (45.4) 29.1 (21.4) 10.9 Recurring EPS (MYR) Recurring P/E (x) P/B (x) P/CF (x) EV/EBITDA (x) Return on average equity (%) Net debt to equity (%) 21.0 net cash net cash net cash net cash Our vs consensus EPS (%) (2.6) (0.6) Source: Company data, RHB estimates See important disclosures at the end of this report Powered by EFA TM Platform 1

2 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. Figure 1: Where PUP is located Source: Company 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 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 ha per year, accelerating to 600-1,200ha/year in FY17-19, and to 1,400-1,600ha/year in the following three years. See important disclosures at the end of this report 2

3 Figure 2: Demonstration of how oil palm is harvested at PUP estate Source: RHB Figure 3: PUP s age profile >25 Yrs, 2% 0-3 yrs, 4% Yrs, 16% 4-10 Yrs, 23% Yrs, 12% Yrs, 65% Source: Company 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 tonne/ha). This is also in line with our projections for PUP s contribution. See important disclosures at the end of this report 3

4 Figure 4: PUP s FFB yield and production 350, , , , , ,000 50, F FFB Production (Tonnes) - LHS FFB Yield (t/ha) - RHS Source: Company 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. Figure 5: PUP's third-party FFB acquisition and mill utilisation rate 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, YTD-Feb % 68% 66% 64% 62% 60% 58% 56% 54% 52% 50% Third Party FFB (Tonnes) - LHS CPO Mill Utilisation (%) - RHS Source: RHB estimates 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. See important disclosures at the end of this report 4

5 Figure 6: PUP's CPO mill Source: RHB estimates On the second day, we visited Felda Global s Sahabat estates, refinery, kernel crushing plant, biomass plant, bulking installations and jetty. Felda Sahabat is a large contiguous block of estates spanning 101,929ha, possibly the largest block of estates in Malaysia. It was the entry point of Sulu invasion of Lahad Datu last year and the location of Operation Daulat, where Malaysian police and armed forces flushed out the invaders. Although this is now in the past, security at the estates is still tight, with army tankers, soldiers and police officers patrolling the area. The army has set up a base in the estates following the Government s compulsory acquisition of 500 acres of settlers land for this purpose. Currently, there are 1,300 army personnel and police officers based in the Sahabat estates. During the invasion, 2.5% of total production (or 41,000 tonnes of FFB) failed to be collected. Figure 7: Felda Sahabat s location Source: Company At end-2013, Felda Sahabat has planted around 96,175ha, of which 81,417ha are mature. The Sahabat estates are fairly old, with an estimated average age of 17 years, and 66.7% of its planted trees are above the age of 19 years. The management has been replanting more aggressively over the last few years, with replanting target of 5,000ha per year. By , all the old palms above the age of 25 years would be replanted, and the average age should come down to years. See important disclosures at the end of this report 5

6 Figure 8: Felda Sahabat s age profile >25 Yrs, 23.8% 0-3 yrs, 15.3% 4-6 Yrs, 9.5% 7-18 Yrs, 8.5% Yrs, 42.9% Source: Company Sahabat s FFB yield has been in a range of 20-21t/ha over the last two years, which management attributed to a lack of rainfall. So far this year, management noted there was dry weather in February but expects little impact on production as the dry spell did not prolong. As such, management targets FFB yields to improve by 8-9% in FY14 and project production to pick up more strongly in 2H14. Within Sahabat s estates, there are nine CPO mills, one kernel crushing plant (450 tonnes/day), a refinery (1,200 tonnes/day), a biomass plant (7.5MW), a biogas plant (1.2MW), an R&D centre, bulking installations (with 59,5000 tonnes of capacity) and its own jetty. Sahabat s average OER has been in the 21-22% range over the last two years, and management expects to achieve an OER of 21.25% in 2014, a 0.13ppt improvement from Figure 9: Felda Sahabat s FFB yield and OER F FFB Yield (t/ha) - LHS OER (%) -RHS Source: Company Sahabat s production cost is estimated to decline to MYR /tonne of FFB in 2014 (from MYR253/tonne in 2013), on the back of lower fertiliser costs. This translates into a CPO cost of around MYR1,100-1,200/tonne of CPO, which is quite commendable vs industry average of around MYR1,300-1,400/tonne. Overall, we believe the site visit proved useful in helping us get first-hand knowledge of Felda Global s plantation operations from the teams on the ground at PUP and Sahabat. 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 it yields to improve in the next few years. See important disclosures at the end of this report 6

7 Figure 10: Felda Sahabat s nursery Figure 11: Felda Sahabat s refinery Source: RHB Source: RHB estimates Figure 12: Felda Sahabat s kernel crushing plant Figure 13: Felda Sahabat s jetty Source: RHB Source: RHB estimates See important disclosures at the end of this report 7

8 Risks Main risks to the plantation division include: i) a convincing reversal in crude oil price trend, resulting in a reversal of CPO and other vegetable oils price trend, ii) weather abnormalities resulting in an over- or undersupply of vegetable oils, iii) changes in the emphasis on implementing global biofuel mandates and trans-fat policies, and iv) a faster- or slower-than-expected global economic recovery, resulting in higher- or lower-than-expected demand for vegetable oils. Main risks to the sugar division include: i) significant changes in the Malaysian sugar industry caused by changes in government regulations, ii) adverse weather conditions which could affect the supply and prices of raw sugar globally, iii) significant changes in global trade policies affecting sugar, which may have an impact on refined sugar prices, iv) major fluctuations in the MYR/USD exchange rate, which would have an impact on raw material costs, and v) increasing competition from domestic or global players. Forecasts Forecasts unchanged. 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 FFB production for YTD-Feb 2014 is 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 making a strong recovery in 2H14. Valuation and recommendation 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 (completed at end-2013) to boost its earnings by at least 10%, while improving its 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. Figure 14: SOP-based valuation P/E Target (x) MYRm Plantations 18x CY14 9,648.0 Manufacturing 12x CY Sugar - MSM (51% stake) RHBRI Target Price 1,968.3 Associates and JV 18x CY14 2,279.5 Net cash/(debt) end-4q13 4,233.3 TOTAL 18,275.6 No Shares ('m) SOP Value (MYR/share) 5.01 Source: RHB estimates Figure 15: Earnings assumptions Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F FFB Produced ( m t) CPO Production - at FHB ( m t) Average CPO price (MYR/t) 2,760 2,900 2,333 2,700 2,900 Source: RHB estimates See important disclosures at the end of this report 8

9 Financial Exhibits Profit & Loss (MYRm) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Total turnover 7,453 12,886 12,568 15,074 16,037 Cost of sales (5,222) (11,319) (11,690) (13,158) (13,964) Gross profit 2,231 1, ,917 2,073 Gen & admin expenses (167) (250) (193) (377) (513) Selling expenses (167) (158) (208) (301) (337) Other operating costs 39 (202) 986 (96) (92) Operating profit 1, ,463 1,142 1,131 Operating EBITDA 2,045 1,066 1,581 1,389 1,490 Depreciation of fixed assets (109) (109) (118) (247) (359) Operating EBIT 1, ,463 1,142 1,131 Net income from investments (17) Interest income Interest expense (141) (111) (103) (206) (206) Exceptional income - net (204) Pre-tax profit 1,905 1,126 1,768 1,267 1,406 Taxation (505) (221) (400) (342) (379) Minority interests (72) (99) (126) (108) (119) Profit after tax & minorities 1, , Reported net profit 1, , Recurring net profit 1, , Source: Company data, RHB estimates Cash flow (MYRm) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Operating profit 1, ,463 1,142 1,131 Depreciation & amortisation Change in working capital 212 (487) (567) 247 (190) Other operating cash flow (96) 252 (439) - - Operating cash flow 2, ,636 1,300 Interest received Interest paid (141) (111) (103) (206) (206) Tax paid (520) (224) (261) (317) (351) Cash flow from operations 1, , Capex (201) (271) (303) (300) (300) Other investing cash flow 1, (847) - - Cash flow from investing activities 1,066 (136) (1,150) (300) (300) Dividends paid (61) (266) (601) (474) (547) Proceeds from issue of shares - 4, Increase in debt (0) (0) Other financing cash flow (1,715) (388) (326) 0 (0) Cash flow from financing activities (1,698) 3,745 (125) (474) (547) Cash at beginning of period 417 1,457 5,673 5,021 5,522 Total cash generated 1,045 4,220 (901) Forex effects (5) (4) Implied cash at end of period 1,457 5,673 4,772 5,522 5,588 Source: Company data, RHB estimates See important disclosures at the end of this report 9

10 Financial Exhibits Balance Sheet (MYRm) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Total cash and equivalents 1,778 5,688 5,021 5,522 5,588 Inventories ,743 1,287 1,448 Accounts receivable ,379 1,166 1,313 Other current assets Total current assets 2,631 7,996 9,052 8,802 9,338 Total investments 2,800 2, Tangible fixed assets 1,002 3,588 8,259 8,312 8,253 Intangible assets ,223 1,223 1,223 Total other assets 42 1,480 1,281 1,281 1,281 Total non-current assets 4,508 8,504 11,683 11,736 11,677 Total assets 7,139 16,499 20,734 20,538 21,015 Short-term debt ,638 1,638 1,638 Accounts payable , ,058 Other current liabilities 144 1,687 1,142 1,023 1,023 Total current liabilities 1,027 2,635 4,141 3,602 3,720 Total long-term debt 1,876 1,621 2,486 2,486 2,486 Other liabilities 145 5,283 5,163 5,163 5,163 Total non-current liabilities 2,020 6,904 7,649 7,649 7,649 Total liabilities 3,048 9,539 11,790 11,250 11,368 Share capital 1,768 3,648 3,648 3,648 3,648 Retained earnings reserve 602 1,192 1,644 1,987 2,347 Other reserves 898 1,262 1,277 1,277 1,277 Shareholders' equity 3,268 6,102 6,570 6,913 7,272 Minority interests ,375 2,375 2,375 Total equity 4,091 6,960 8,945 9,287 9,647 Total liabilities & equity 7,139 16,499 20,734 20,538 21,015 Source: Company data, RHB estimates Key Ratios (MYR) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Revenue growth (%) (2.5) Operating profit growth (%) 0.0 (50.6) 52.9 (21.9) (1.0) Net profit growth (%) 0.0 (39.3) 54.2 (34.2) 10.9 EPS growth (%) 0.0 (62.1) 19.6 (34.2) 10.9 Bv per share growth (%) Operating margin (%) Net profit margin (%) Return on average assets (%) Return on average equity (%) Net debt to equity (%) 21.0 (49.8) (10.0) (15.1) (15.2) Recurrent cash flow per share Source: Company data, RHB estimates See important disclosures at the end of this report 10

11 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 SWOT Analysis Its large scale gives it strong bargaining power in negotiating for contracts or supply purchases Low-hanging fruit, as losses at its downstream division could mean stronger earnings growth vs its peers, should these operations turn around Its huge cash hoard postlisting in 2012 gives the group the flexibility and bargaining power to potentially acquire large assets or even already profitable plantation assets, which other companies may not be able to digest New rules and regulations governing landbank acquisition or expansion in Indonesia could limit long-term growth The environmental groups continued scrutiny on the palm oil industry could have a negative effect on the company Small non-core loss-making operations within the group could be a drag on earnings P/E (x) vs EPS growth P/BV (x) vs ROAE 80 1,200% 30 80% ,025% 850% 675% % 53% % 15 40% % 150% -25% % 13% 0-200% 0 0% P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs) Source: Company data, RHB estimates Source: Company data, RHB estimates Company Profile Felda Global Ventures is the commercial arm of the Federal Land Development Authority (FELDA) in the upstream and downstream palm oil business and other agribusinesses. The group currently produces oil palm and rubber plantation products, soybean and canola products, oleochemical products and sugar products, and has operations across 10 countries. Felda Global Ventures was listed on the Bursa Malaysia in June See important disclosures at the end of this report 11

12 NR Recommendation Chart Recommendations & Target Price Price Close 4.0 Jun-12 Dec-12 May-13 Nov-13 Buy Neutral Sell Trading Buy Take Profit Not Rated Source: RHB estimates, Bloomberg Date Recommendation Target Price Price Buy Buy Buy Buy Buy Buy Neutral Neutral Neutral Neutral Source: RHB estimates, Bloomberg See important disclosures at the end of this report 12

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