Tuesday, March 15, 2016

Felda Global Venture must end its value-destroying acquisition spree which smacks of utter recklessness and sheer incompetence

Felda Global Venture Holdings Bhd (FGVH) has been the undisputed worst plantation stock performer  ever  since  its  initial  public  offering  (IPO) in  July  2012. The  share  price  decline was so bad that the company was removed from the Bursa Malaysia KLSE Index stocks last year.

Since its hyped-up listing at RM4.45 per share, the battered government-linked stock closed at RM1.51  yesterday  representing  a  whopping  66%  decline  in  share  prices. Despite  its acquisition spree  since  then,  FGVH  net  profits  have  tanked from  RM1.33  billion  in  the financial year ending 31 December 2011 to a pitiful RM117 million in 2015.

Among  its  major  acquisitions  included  Pontian  United Plantations  Bhd  at  RM1.2  billion  in October 2013, Asian Plantations Ltd at RM568 million in October 2014 and Felda Iffco South China Ltd at approximately RM181 million. The undisputed turkey of the year however will go to FGVH’s proposed US$680 million 37% acquisition  of  Eagle  High  Plantations  (EHP)  at  the  outrageous price  of  Rp775  per  share in June 2015 whose stock price closed at Rp270 yesterday.  That means FGVH will pay nearly 3 times the market price of EHP, an absurd acquisition by any measure!

The EHP deal has yet to be completed but FGVH is in a limbo because the company paid a exorbitant 25% non-refundable deposit of US$174.5 million for the shares of EHP already!

The spate of acquisitions by FGVH should by right be earnings accretive, meaning they will add profits to the group.  However, despite having used up all of its cash raised during the initial public offering in 2012, the more acquisitions it conducts, the less profits it makes.
In another stunning announcement last week, before the dust over EHP has settled, FGVH is now proposing  to  acquire  55%  of  Zhong  Ling  Nutri-Oil  Holdings  Ltd  for  RM976  million. Zhong Ling is a company registered in Cayman Islands with interests in the Chinese market refining and distributing peanut and other edible vegetable oils.

There  are  many  questions  arising  from  this  particular  transaction  including  the  reason  for FGVH  to  acquire  a  peanut  oil  company  and  variances  arising  from  a  complicated  profit guarantee by Zhong Ling’s vendors.

However, the biggest question which FGVH must answer to its shareholders, which include not only state-owned  funds  like  EPF  and  Tabung  Haji,  but  also  more  than  90,000  Felda settlers  is, why is  FGVH  acquiring  a  company  which  has  failed  to  complete  its  audited accounts since December 2013!

The failure to complete and table Zhong Ling’s financial audit for December 2014 or 2015 in a timely manner by a reputable international auditor is the clearest warning sign that all is not well within Zhong Ling.  It gives the signal that Zhong Ling’s shareholders are seeking a profitable exit by disposing  of  the  troubled  assets  to  a company  desperate  to  boost  its earnings.

If Zhong Ling is indeed financially sound, why shouldn’t FGVH just request for the company to complete its missing audit first before negotiating the acquisition.  Why must FGVH rush in headlong into the acquisition, bear the risk of an unaudited company backed by a highly questionable guarantee arrangement by Zhong Ling’s main shareholder?

We  call  upon  the  Board  of  Directors  of  FGVH  to  protect  the interest  of  the  company’s shareholders  by  immediately  terminating  the  acquisition.    The  deal  should  only  ever  be considered after Zhong Ling has regularized its audit short-comings, and even so, only if the latter allows a separate independent audit be carried out to verify the financial statements.
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