Felda Global Ventures Holdings PLANTATION

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1 PP13693/03/2013(032114) Initiating Coverage 4 June 2012 Felda Global Ventures Holdings PLANTATION Venturing into a new business model Felda Global Ventures Holdings Bhd (FGVH) is on track to raise some RM9.9bn from its listing, making it the world s second largest IPO this year after Facebook. We initiate coverage on FGVH with a BUY recommendation and TP of RM5.65. Our TP is based on a PE of 16x pegged against FY12 EPS. Buy Bloomberg Ticker: FGVH MK Key data IPO price (RM) 4.55 Listing sought Main market Closing date of application 13 Jun 12 Listing date 28 Jun 12 Market IPO price (RM m) 16,599 Issued shares (m) 3,648 3 rd largest plantation operator globally FGVH is the third largest (by landbank) listed palm oil operator globally. In addition, they have access to the largest crude palm oil (CPO) producer globally in the form of Felda Holdings Bhd (FHB). FGVH s business model will change substantially going forward due to the land lease agreement (LLA) signed with Felda and the execution of new commercial contracts with regards to CPO and soybean/canola. Investment merits Room for yields to climb. FGVH s fresh fruit bunches (FFB) yield/ha are above the Malaysian Palm Oil Board (MPOB) average, but remain below other established plantation companies such as IOI Corp and Genting Plantations. Assuming FGVH is able to boost its yields from 19.9MT/ha to 22-23MT/ha in the next few years, this will provide FGVH with the needed FFB production growth. Aggressive replanting program to drive age profile. FGVH is embarking on a mission to reduce the maturity profile of its plantations by going on an expansive replanting program. FGVH targets to replant 15,000 ha per year (about 4% of its total land) and use better and more efficient materials from its R&D division to improve yields. Hefty war chest to be used for potential acquisitions. Post listing, FGVH intends to set aside around RM3bn to expand its business. This includes RM2.19bn for acquisition of plantations assets and RM840m for the acquisition of downstream assets. Potential partnerships with established companies. By looking for and entering JVs with well-known industry players, FGVH is able to leverage on the knowledge and expertise of these players to enhance their downstream operations. 12-month upside potential Target price 5.65 IPO price 4.55 Capital upside (%) 24.2 Net dividends (%) 3.9 Total return (%) 28.1 IPO offer (m shares) Public 73.0 Eligible directors & employees Institutional Offering 1,915.3 Major shareholders (Post-IPO) % Felda 40.0 Analyst Team Coverage research@ecmlibra.com Key risks Fluctuation of CPO prices. Profitability dependent on commercial contracts. Competition from Indonesian refiners. Reliance on foreign labour. Production may be affected by external factors. Exposed to foreign currency risk. Valuation We initiate coverage on FGVH with a BUY recommendation. We value FGVH at RM5.65 based on 16x PE pegged against FY12 EPS of 35.3 sen. Our PE is based on the average of IOI Corp s and KL Kepong s calendarised PE (due to different year ends). Our TP implies a FY12 P/B of 3.4x and dividend yield of 3.1%.

2 SNAPSHOT OF FINANCIAL AND VALUATION METRICS Figure 1 : Key financial data FYE 31 Dec FY11 FY12F FY13F FY14F Revenue (RM m) 7, , , ,501.5 EBITDA (RM m) 2, , , ,636.7 EBIT (RM m) 2, , , ,471.2 Pretax profit (RM) 1, , , ,605.7 Reported net profit (RM m) , , ,095.2 Adj net profit (RM m) , , ,095.2 EPS (sen) Adj EPS (sen) ECM / Consensus (%) EPS growth (%) 37% -22% 9% P/E (x) ROE (%) Net DPS (sen) Dividend yield (%) BVPS (RM) P/BV (x) Source: ECM Libra Figure 2 : Sector comparison Company Call Target price (RM) Share price (RM) Mkt Cap EPS Growth (%) P/E (x) P/BV (x) ROE (%) Net Dividend Yield (%) (RM m) FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13 Felda Global Ventures Buy , Sime Darby Hold , IOI Corp Hold , KL Kepong Hold , Genting Plantations Hold , Average (ex-fgvh) Source: ECM Libra, Bloomberg Share price date: 1 June 2012 Felda Global Ventures Holdings Venturing into a new business model 4 June

3 IPO DETAILS Figure 3 : IPO details % million shares Enlarged Share Capital 3,648.2 Existing shares offered ,208.9 New shares offered Institutional Offering MITI Other Malaysian institutions & investors ,495.8 Total ,915.3 Retail Offering Malaysian public Employees, settlers Total Listing Price RM4.55/share Source: Prospectus Figure 4 : Utilisation of Proceeds RM m % Acquisition of oils & fats, manufacturing & logistics businesses Acquisition of plantation assets 2, Construction/acquisition of mills/refineries Loan repayment Capital expenditure Working capital Listing expenses Total Proceeds 4, Source: Prospectus Felda Global Ventures Holdings Venturing into a new business model 4 June

4 COMPANY OVERVIEW History and background The Federal Land Development Authority (Felda) was established on 1 Jul 1956 under the Land Development Ordinance (Land Development Act), Felda s historical mission has been to carry out land development and settlement in new areas with the objective of creating farming communities with economically viable agricultural holdings. By 1990, a total of 853,313 ha had been brought under cultivation through Felda s operations. On 19 Dec 2007, Felda Global Ventures Holdings (FGVH) was incorporated as a wholly-owned subsidiary to operate as Felda s investment arm for its overseas investments, primarily North America. However since then, FGVH has ventured into upstream plantations in Malaysia and Indonesia, downstream palm oil and sugar. Figure 5 : Milestones of FGVH Year Milestone 2007 Incorporated as a wholly owned subsidiary of Felda 2008 Acquired FGV North America from Felda (including investments in TRT Holdings) 2009 Acquired 49% stake in FHB from Felda Acquired 50% stake in Felda IFFCO from FHB Acquired 50% stake in Trurich from Lembaga Tabung Haji 2010 Fully acquired MSM Acquired 50% stake in KGFP Acquired 20% stake in Tradewinds Acquired 5,797 ha of sugar cane plantations from PPB Group Bhd 2011 MSM was listed on Bursa Malaysia s Main Market Acquired 49% stake in Bunge ETGO 2012 New land lease agreement between Felda and FGVH comes into effect Enters FFB/CPO agreement with F Palm Industries Acquired a 95% stake in PT Citra Niaga, which owns 14,000 ha in Indonesia Group structure Figure 6 : Group corporate structure Felda Global Ventures Holdings Venturing into a new business model 4 June

5 Business Segments FGVH primarily operates in 3 business segments: Plantations Downstream Sugar Figure 7 : Revenue breakdown (2011) Figure 8 : Operating profit breakdown (2011) Plantations FGVH made its foray into the plantations segment in 2009 when it acquired a 49% stake in FHB from Felda. FHB is the largest CPO producer in the world in terms of CPO volume produced. In 2011, FHB sourced 16.1m MT of FFB and produced 3.3m MT of CPO. Besides sourcing FFB from Felda leased lands, FHB s other main sources of FFB are Felda settlers, third parties and its subsidiary F Agricultural. FFB produced on Felda leased land accounted for 31.9% of FHB s feedstock. FHB has a milling capacity of 20.4m MT, spread over 70 mills in Malaysia. Figure 9 : FGV Plantations structure Figure 10 : FHB s sources of FFB (2011) For FGVH, the real kicker came in November 2011, when FGVH signed a Land Lease Agreement (LLA) with Felda to lease 355,864 ha of plantation land. 67% of the land is located within Peninsula Malaysia, while 31% and 2% of the land is located within Sabah and Sarawak, respectively. The terms of this lease begin from 1 Jan 2012 for a period of 99 years. Based on the terms of this lease, FGVH must pay Felda RM248.5m (or RM698.24/ha) pa together with a fixed percentage of FGVH s plantations operating profit attributable to the lands. The annual fixed lease amount of RM248.5m is subject to review every 20 years. We feel that the land lease price is cheap. To put things into perspective, we estimate that Boustead REIT leases out its 19,000 ha plantation land for RM69m pa, roughly translating into RM3,500/ha. Felda Global Ventures Holdings Venturing into a new business model 4 June

6 In addition to the LLA, FGVH also signed an agreement with FHB on 22 Feb 2012, whereby F Palm Industries (F Palm), a subsidiary of FHB, shall buy all the FFB produced by FGVH on Felda leased lands. Subsequently, FGVH shall buy nearly all the CPO that F Palm produces (which is not used by FHB s subsidiary Delima Oil Products for example) at a price based on MPOB spot prices. This agreement is valid for 99 years, commencing on 1 Mar With this agreement, FGVH will no longer recognize FFB sales, and going forward they will recognize sales of CPO which they sell on behalf of F Palm. Therefore their contract with F Palm shall turn into a tolling agreement. Figure 11 : Maturity profile (Malaysia) Figure 12 : Maturity profile (Indonesia) Besides this, FGVH also has exposure to plantations in Indonesia through Trurich, its 50:50 JV with Lembaga Tabung Haji. Trurich has access to 42,000 ha of plantation land located in Kalimantan. The maturity profile of this land is young, as 21% is immature while 66% remains unplanted. FGVH also has a 95% stake in PT Citra Niaga, which owns 14,385 ha of plantation land in Kalimantan. This land remains unplanted. FGVH is also involved in the production of rubber in the form of cup lumps. Out of the 355,864 ha Felda leased land, 10,308 ha is allocated to rubber plantations located in Peninsula Malaysia. The maturity profile for their rubber plantations is 45% immature, 12% mature and 43% old. Revenue from the rubber segment equaled to RM89.9m in 2011, representing 1.2% of FVGH s FY11 revenue. Downstream FGVH s downstream operations consist of (i) soybeans and canola products, and (ii) oleochemical products. FGVH, through its subsidiary TRT-ETGO, traditionally produces soybean and canola products by crushing and refining soybeans and canola seeds at its crushing and refining facility in Canada. The primary products produced are RBD soy and canola oils, degummed soy & canola oils, and soy and canola meals. In December 2011, FGVH s JV Bunge ETGO (Partnership) signed a tolling agreement with TRT- ETGO. This agreement would mean that TRT-ETGO would crush canola seeds and soybeans into value-added products for the Partnership. Prior to this agreement, TRT-ETGO would purchase the required raw materials from third parties, process it, and then sell it. Therefore FGVH will no longer recognize the revenues and costs related to it, and only receive a tolling fee. The agreement is indefinite, but either party may terminate it as of 9 Dec We opine that this agreement is positive for its soybeans and canola segment. Although revenue contribution would be reduced, potential losses would be limited, provided optimal refining capacity levels are attained. Felda Global Ventures Holdings Venturing into a new business model 4 June

7 Figure 13 : Downstream structure FGVH, through its subsidiary TRT Holdings, also produces oleochemicals such as fatty acids and glycerin, from tallow, lauric oils and vegetable oils at their facility in Massachusetts. Fatty acids are used in the production of food, personal care, products, cosmetics, pharmaceuticals, rubber & textile products, while glycerin is widely used in pharmaceutical formulations, including as food and beverage additives and as an intermediary in the production of soaps and other pharmaceuticals. TRT Holdings fatty acids and glycerin are sold primarily to manufacturers of consumer and industrial goods in North America. Felda IFFCO is a JV between FGVH and IFFCO Group, a mass market consumer goods manufacturer and marketer based in the United Arab Emirates. Through this JV, FGVH has interests in palm oil refineries and downstream processing facilities in Malaysia, Indonesia, China, Turkey and South Africa. Sugar Recall in our MSM IPO Note, FGVH acquired MSM Malaysia Holdings (MSM) and its related businesses from PPB Group for RM1.25bn in January According to FGVH s prospectus, MSM is Malaysia s largest sugar producer, producing 958,377MT of sugar in 2011, which accounted for 57% of domestic refined sugar production. The main brands under MSM are Gula Prai and Gula Perlis, while key customers consist of F&N Beverages Sdn Bhd, Permanis Sdn Bhd (PepsiCo) and Nestle Manufacturing (M) Sdn Bhd. Figure 14 : Gula Prai Figure 15 : Gula Perlis Source: Google Images Source: KGFP website In addition to MSM, FGVH also has a 20% stake in Tradewinds Bhd. Tradewinds market share of the local refined sugar scene is 43%, and together with MSM account for all the refined sugar production in the country (duopoly). Felda Global Ventures Holdings Venturing into a new business model 4 June

8 INVESTMENT MERITS Room for yields to climb FGVH s FFB yield/ha between have been MT/ha, above the MPOB benchmark of MT/ha, but way below the average of the other companies within our coverage of MT/ha. This means that with efficient plantation management efforts, it would not be unreasonable to expect FGVH s yields to reach levels of MT/ha in the future. Figure 16 : Yield comparison Source: ECM Libra, Bloomberg Aggressive replanting program to drive age profile FGVH is about to embark on an aggressive replanting program, that would provide much needed rejuvenation to its aging tree profile. While historically FGVH had been seen to be reactive when it came to replanting old trees, since 2007 FGVH had been ramping up their replanting operations. FGVH intends to replant about 15,000 ha pa, which would help lower the average age of their plantation landbank. FGVH believes that the use of higher yielding materials (sourced from their R&D activities), combined with improved agronomic practices can improve the production yields of replanted areas by 20-30%. Figure 17 : Replanting schedule Source: ECM Libra, Bloomberg Felda Global Ventures Holdings Venturing into a new business model 4 June

9 Hefty war chest to be used for potential acquisitions With the funds raised from the IPO, FGVH plans to set aside RM840m for the purpose of acquisition of oils & fats, manufacturing & logistics businesses, and RM2.19bn for the acquisition of plantation assets. We expect FGVH to venture into countries such as Indonesia and Africa to expand their plantation assets, as these countries are able to provide soil and climate conditions similar of those to Malaysia. On the downstream front, we expect FGVH to expand into fast growing economies such as China and India. Potential partnerships with established companies As reported in the local news wires, FGVH has been on the lookout for potential partnerships with well-known players to form a partnership with in the downstream sector. This would allow FGVH to leverage on the knowledge and expertise of these players through JVs to further enhance their downstream operations. For example, when FGVH operated in the soybean & canola business in Canada, they experienced losses due to the low utilization rates. However, after the tolling agreement, FGVH is able to leverage on the Bunge s expertise in procuring and marketing their products. INDUSTRY OUTLOOK Demand for food will continue to grow According to Frost & Sullivan, world population in 2010 was approximately 6.8bn, growing 28% from 5.3bn in Observations showed that developing countries had higher population growth rates as compared to developed countries. Over the years, developing countries had been spending more on food products, as increasing disposable income causes changes in their dietary intake, shifting from staple food products such as cereals to livestock and vegetables. The increase in world population and the increasing desire to consume better diets will drive demand for palm oil in the future. Frost & Sullivan estimates that 3-year palm oil supply CAGR will be 5.9%, while 3-year demand CAGR will be 4.8%. Figure 18 : Palm oil supply trend Figure 19 : Palm oil demand trend Source: Prospectus Source: Prospectus CPO prices to remain steady We attribute the recent selldown of CPO futures causing prices to reach RM3,100/MT, to the negative sentiment in the Eurozone. We believe that fundamentals remain on track, and that CPO prices will strengthen in the near future. The recent drought in South America has caused soybean supplies to come in below expectations, causing production forecasts to drop as much as 15% in recent months than originally expected. Coupled with potential reductions in US soybean plantings and an aggressive Chinese buying policy, we expect CPO prices to be sustained by the strong soybean prices. Our CPO price assumption is RM3,200/MT for 2012 and RM2,800/MT in Felda Global Ventures Holdings Venturing into a new business model 4 June

10 Figure 20 : Malaysian CPO spot prices Figure 21 : Rotterdam oil seed prices Avg prices: RM2,750/mt Source: Bloomberg, ECM Libra Source: Bloomberg, ECM Libra RISK FACTORS Profitability dependent on commercial contracts FGVH s profitability is dependent on its agreements (LLA, commercial contracts, etc.). Any change in the agreements would affect FGVH s profits by varying amounts. Fluctuation of CPO prices The plantation segment is FGVH s largest contributor to operating profit. Fluctuations in CPO selling prices will affect the segment s profitability. Competition from Indonesian refiners Recently, Indonesia adjusted their palm oil export tax structure. This gave Indonesian refiners greater bargaining power when procuring CPO as exporting CPO became expensive. Additionally, the lower export tax for refined products allowed Indonesian refiners to sell cheaper products compared to their Malaysian counterparts. This caused two problems for Malaysian refiners. Firstly, they were unable to obtain sufficient CPO from Indonesia to process at their refineries, causing low utilization rates, thus a reduction in profits. Secondly, Malaysian refined products became more expensive than Indonesian products causing Malaysian players to cut prices and face lower margins. Reliance on foreign labour Plantation companies in Malaysia significantly rely on foreign workers (primarily from Indonesia) to work on their plantations. FGVH currently employs some 25,000 foreign estate workers, representing 84% of their estate workforce and 73% of their total workforce. We believe this is due to locals preferring to work in urban areas, away from rural areas, due to the perceived advantageous standard of living. Should any difficulty arise from obtaining permits for foreign workers, or if the Indonesian authorities were to impose a moratorium on Indonesian workers in Malaysia, this would affect FGVH s ability to harvest FFB at an optimum level. Production may be affected by external factors Palm oil, just like any other agricultural commodity, is reliant on weather conditions to produce the ideal amount of FFB. Malaysia is susceptible to adverse weather conditions such as El Nino and La Nina, which may affect the FFB output from FGVH s estates, thus affecting profits. Exposed to foreign currency risk A substantial portion of FGVH s transactions are denominated in USD. Should the RM appreciate against the USD, this will affect FGVH s reported financial performance. Felda Global Ventures Holdings Venturing into a new business model 4 June

11 VALUATION & RECOMMENDATION We initiate coverage on FGVH with a BUY recommendation. We value FGVH at RM5.65 based on 16x PE pegged against FY12 EPS of 35.3 sen. Our PE is based on the average of IOI Corp s and KL Kepong s calendarised PE. Our TP implies a FY12 P/B of 3.4x and dividend yield of 3.1%. Key assumptions Figure 22 : Key assumptions FY2012F FY2013F FY2014F CPO price (RM/mt) 3,221 2,800 2,800 FFB yield (mt/ha) Source: ECM Libra Sensitivity analysis Figure 23 : EPS sensitivity Figure 24 : TP sensitivity (FY12) FGVH FY12 FY13 FY14 CPO price assumption (RM) 3,221 2,800 2,800 EPS forecast (sen) Change in EPS for RM100 increase in CPO prices 5% 7% 7% Source: ECM Libra CPO price assumption TP (RM) Change (%) Source: ECM Libra 2, (23) 2, (17) 3, (12) 3, (6) 3, , , Felda Global Ventures Holdings Venturing into a new business model 4 June

12 APPENDIX 1 Figure 25 : Upstream production process APPENDIX 2 Figure 26 : Downstream production process Felda Global Ventures Holdings Venturing into a new business model 4 June

13 DISCLOSURE & DISCLAIMER Stock rating definitions Strong buy - High conviction buy with expected 12-month total return (including dividends) of 30% or more Buy - Expected 12-month total return of 15% or more Hold - Expected 12-month total return between -15% and 15% Sell - Expected 12-month total return of -15% or less Trading buy - Expected 6-month total return of 15% or more arising from positive newsflow. However, upside may not be sustainable. Sector rating definitions Overweight - Industry expected to outperform the market over the next 12 months Neutral - Industry expected to perform in-line with the market over the next 12 months Underweight - Industry expected to underperform the market over the next 12 months Disclaimer This report is for information purposes only and general in nature. The information contained in this report is based on data and obtained from sources believed to be reliable. However, the data and/or sources have not been independently verified and as such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this report. Accordingly, neither we nor any of our related companies and associates nor persons related to us accept any liability whatsoever for any direct, indirect or consequential losses (including loss of profits) or damages that may arise from the use of or reliance on the information or opinions in this publication. Any information, opinions or recommendations contained herein are subject to change at any time without prior notice. It is not possible to have regard to the specific investment objectives, the financial situation and the particular needs of each person who may receive or read this report. As such, investors should seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. Under no circumstances should this report be considered as an offer to sell or a solicitation of an offer to buy any securities referred to herein. This company and its related companies, their associates, directors, connected parties and/or employees may, from time to time, own, have positions or be materially interested in any securities mentioned herein or any securities related thereto, and may further deal with such securities and provide advisory, investment or other services for any company or entity mentioned in this report. In reviewing this report, investors should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflict of interests. Published & printed by: ECM Libra Capital Sdn Bhd ( A) 2nd Floor, West Wing, Bangunan ECM Libra No. 8 Jalan Damansara Endah Damansara Heights Kuala Lumpur Tel: (603) Fax: (603) Felda Global Ventures Holdings Venturing into a new business model 4 June