• Did FGV buy into a High Risk asset in Eagle High Plantations, formerly known as BW Plantations?

    Media Statement by Dr. Ong Kian Ming, MP for Serdang, on the 17th of June, 2015

    Did FGV buy into a High Risk asset in Eagle High Plantations, formerly known as BW Plantations?

    Last Friday, it was announced that Felda Global Ventures (FGV) would be buying 37% of Eagle High Plantations (EHP), formerly known as BW Plantations, for around RM2.6 billion in cash and FGV stock. Among some of the reasons given by FGV for this purchase is increasing its exposure to non-Land Lease Agreement (LLA) landbank and a significant greenfield landbank expansion potential in Indonesia via this acquisition (See Figure 3 below).

    EHP does indeed have a large landbank of 419,000 hectares. Its 147,000 hectares of planted palm oil makes it the third largest palm oil company listed on the Indonesian Stock Exchange. But what FGV has not come out to say thus far is the potential challenges and cost associated with developing this large unplanted landbank.

    In a report that was published on the 20th of November 2014 by Chain Reaction Research, a Washington DC based environmental risk analysis research outfit, the reserve takeover of BW Plantation by the Rajawali Group was classified as a HIGH RISK venture.[1]

    Among the risks cited is that “for 70% of its land bank, permits are not yet secured to start oil palm planting, and it is far from certain that they will be” as well as serious concerns “in relation to peatland development, deforestation and encroachment in orang-utan impat” which may affects its main customers who are committed to the “No Deforestation, No Peatland, No Exploitation” policy.

    As shown in Table 1 below, 65% of EHP’s land bank (formerly BW Plantation) are unplanted and most of this is from the Green Eagle and additional Rajawali land bank that was injected into BW Plantation as part of Rajawali’s reserve takeover exercise conducted in November 2014.

    The Chain Reaction Research report further states that for the unplanted land bank, the “licensing process is still in a very preliminary stage: there is only a location permit (Ijin Lokasi). Location permits have a legal expiration date, and often these permits are not converted into real plantation development rights. Unlike many similar reports, BW Plantation’s prospectus does not provide details on the prospects of the unplanted land bank actually being developed. As the valuation of Green Eagle Holdings is mainly based on the potential of its unplanted land bank, this lack of disclosure should be of serious concern to shareholders of BW Plantation.”

    The report also shows that 40% of BW Plantation sales in 2014 were to Golden Agri-Resources and Wilmar, both of which have publicly committed to the “No Deforestation, No Peatland, No Exploitation” policy.

    In other words, even though EHP has a large land bank, the licenses to develop the unplanted land bank have not all been approved and EHP may not be able to find enough customers if its planting policies in these areas are not in accordance to recognized standards of sustainability.

    The CCR report is further proof that FGV is overpaying for its 37% stake in EHP and that FGV’s shareholders – the FELDA settlers and the general public – will end up paying for the mistakes of FGV’s management and board of directors.

    Dr. Ong Kian Ming
    Member of Parliament for Serdang

    [1] http://chainreactionresearch.com/reports/bw-plantation/

  • FGV’s proposed purchase of 37% of Eagle High Plantations is allowing the Rajawali Group to enjoy an estimated profit of US$328million in six months

    Media Statement by Dr. Ong Kian Ming, MP for Serdang, on the 16th of June, 2015

    FGV’s proposed purchase of 37% of Eagle High Plantations is allowing the Rajawali Group to enjoy an estimated profit of US$328million in six months

    FGV’s share price dropped from RM1.86 at yesterday morning’s opening bell to RM1.65 at the closing bell, a fall of 21 sen or a one day fall of 11% in FGV’s share price. The market was reacting negatively to FGV’s proposed purchase of a 37% stake in Indonesian palm oil company, Eagle High Plantations for US$679 million.

    Eagle High Plantations was originally known as BW Plantation before it was acquired by the Rajawali Group at the end of 2014.[1] The Rajawali Group, which is controlled by Indonesian billionaire Peter Sondakh, gained control of BW Plantation by subscribing to a rights issue priced at Rp400 per share. Since the acquisition of BW Plantation, subsequently renamed Eagle High Plantations (EHP), by the Rajawali Group, the share price of EHP has been performing poorly, hitting a low of Rp245 per share on the 5th of April, 2015.

    Hence, it must have caught the market by surprise when FGV made an offer to acquire 37% of EHP through a combination of cash and FGV shares from the Rajawali group which was valued at US$679 million or Rp775 per share. When this deal was announced on the 12th of June, 2015, EHP was at Rp450 per share on the Jakarta Stock Exchange.

    The proposed acquisition by FGV would give the Rajawali group a profit of approximately US$328 million on the 11.664 billion shares of EHP (most of it likely acquired at Rp400 per share), which it would sell to FGV if the proposed deal is approved. This is a tidy sum indeed for the Rajawali group, which will succeed not only in making a tidy profit in 6 months but also still hold effective control of EHP after its share disposal to FGV.

    Furthermore, even if FGV decides not to go through with the proposed acquisition, it would lose its deposit of US$174.5m (RM657.9m) which represents approximately 23% of the total value of the transaction. This deposit was considered high by a CIMB analyst report which noted that a regular sale and purchase agreement only requires a 10% deposit.

    This proposed acquisition of EHP by FGV is a poor decision by the management as well as the board of directors of FGV. It stinks of the type of poor corporate governance that landed 1MDB in financial trouble, and it seems very likely that the shareholders of FGV which includes FELDA settlers as well as the members of the public (via shareholdings of KWAP, Tabung Haji and EPF) will have to pay for these poor decisions.

    The Rajawali group nets a tidy profit while ordinary Malaysians will have to pay the price. Something is indeed very rotten in the state of FGV.

    Dr. Ong Kian Ming
    Member of Parliament for Serdang

    [1] http://www.thejakartapost.com/news/2014/11/29/bwpt-merge-with-rajawali-unit-after-rp-108t-rights-issue.html

  • FGV’s purchase of PT Eagle High Plantations (EHP) stocks from the Rajawali group is expensive and will result in the further deterioration of the FGV stock price

    Media Statement by Dr. Ong Kian Ming, MP for Serdang, on the 15th of June, 2015

    FGV’s purchase of PT Eagle High Plantations (EHP) stocks from the Rajawali group is expensive and will result in the further deterioration of the FGV stock price

    It was announced last Friday, on the 12th of June, 2015, that Felda Global Ventures (FGV) has made a proposal to acquire a 37% stake in PT Eagle High Plantations (EHP) for US$680 million (or RM2.55 billion) in cash and stocks from the Indonesian based Rajawali Group.[1]

    In a “Flash Note” issued by CIMB yesterday, 14th of June, 2015, the acquisition was viewed as “negative” because the acquisition price of Rp775 per share was seen as expensive (EHP’s last closing price was Rp450 per share), the acquisition will not give FGV a controlling stake in EHP, the acquisition will dilute FGV’s net profit in Financial Year 2016 by 10%, the net gearing ratio of FGV will rise from 1.05X to 1.43X and the cashflow of FGV will be negatively impacted. As a result, the CIMB analyst cut the SOP target-price of FGV to RM1.69 and the call for a ‘reduce’ recommendation for FGV was maintained.

    This morning, at the time of writing (11am Malaysian time), the share price of FGV has fallen by 16 sen from RM1.86 at the opening bell to RM1.70. This represents a 63% fall in the stock price of FGV when it first listed at RM4.55 per share. While some have attributed the fall in the FGV stock price to the floods in Kelantan as well as the low Crude Palm Oil (CPO) prices, a comparison of other palm oil stocks in Malaysia will show that FGV’s stock price has dropped the most in the past one year.

    Figure 1: Comparison of stock price of FGV, United Plantations (UPL), Genting Plantations (GENP), Kuala Lumpur Kepong (KLK) and IJM Plantations (IJMP) over the past one year

    As of last Friday, 11th of June, 2015, the stock price of FGV has fallen by 56.6% over the past one year compared to a decrease of 3.2% for United Plantations (UPL), a decrease of 6.2% for IJM Plantations (IJMP), a decrease of 8.7% for Genting Plantations and a decrease of 12.6% for Kuala Lumpur Kepong (KLK).

    FGV’s strategy of purchasing plantations with younger age profiles must be justified from a costing and valuation perspective. The CIMB “Flash Note” clearly shows that the valuations which FGV is paying for EHP is expensive. Specifically, it stated that:

    “The blended acquisition price for EHP of Rp775 represents a 72% premium to its last closing market price of Rp450 and is 267% above CIMB’s target price for EHP of Rp290 per share. The pricing is also 94% above the recent 6-for-1 rights issue price of Rp400 per share for EHP, which was completed in Dec 14.”

    The FGV board and management must answer to its shareholders which includes the FELDA settlers as well as the Malaysian public (via KWSP, KWAP and Tabung Haji shareholdings). Why was this acquisition proposed and at such a high price? Will the board and management take responsibility for the negative perception from the market which has led to the continued decline in FGV’s share price?

    Dr. Ong Kian Ming
    Member of Parliament for Serdang

    [1] http://www.thestar.com.my/Business/Business-News/2015/06/12/FGV-to-buy-37-pc-of-PT-Eagle-High-Plantations/?style=biz

  • Bank Negara Malaysia (BNM) has no business getting into the business of education

    Media Statement by Dr. Ong Kian Ming, MP for Serdang, on the 1st of June, 2015

    Bank Negara Malaysia (BNM) has no business getting into the business of education

    It was announced in April 2015 that Bank Negara Malaysia (BNM) was entering into a 10 year business relationship with the Massachusetts Institute of Technology’s Sloan School of Management (MIT Sloan) to establish the Asia School of Business (ASB) in Kuala Lumpur.[1]

    While it is laudable that Bank Negara has the vision to turn the Asia School of Business into a “premier business school that develops transformative and principled leaders who will contribute to a better future and advance the emerging world”[2], the business of education is not and should not be the business of the central bank. Indeed Act 5 (1) of the Central Bank Act of Malaysia 2009 states that the “principal objects of the Bank shall be to promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy”. Act 5 (2) lists down the primary functions of the Bank including (i) formulating and conducting monetary policy in Malaysia (ii) the issuance of currency (iii) the regulation and supervision of financial institutions (iv) exercising oversight over the payment systems (v) managing our foreign reserves (vi) to act as financial adviser, banker and financial agent of the Government. Nowhere in this list or in this act does it say that Bank Negara should get involved in the business of education, especially when it has no direct implications on the financial and banking sector in the country!

    While Section 48 (1) of the Central Bank Act of Malaysia 2009 allows Bank Negara to (i) establish a body corporate for the purpose of training, research and development of human resource in relation to banking and financial services and (ii) establish a body corporate for the purposes of providing financial counselling, debt management services and education on financial management, it must be noted that Bank Negara has already done this by establishing the International Center for Education in Islamic Finance (INCEIF) to develop academic expertise in Islamic Finance[3] and the Credit Counselling and Debt Management (CCDM) Agency[4] to increase public awareness of debt management.

    Even in the area of developing leaders and inculcating leadership skills, Bank Negara has already established the ICLIF Leadership and Governance Center.[5] With the establishment of all these institutes and agencies, why is there the need to set up yet another entity, the Asian School of Business, which seems to have little direct relationship to the banking and financial services sector?

    We have seen this script before. The Malaysian University of Science and Technology (MUST) had a collaboration with MIT in 2001 on post graduate programs. Once the government decided to stop funding full scholarships, the enrolment dropped significantly.[6] Ultimately the partnership was cancelled after a founding grant of RM100 million was given by the Malaysian government.

    The Perdana University also launched a much publicized graduate medical degree with the renowned Johns Hopkins School of Medicine in 2010 by none other than the then Secretary of State, Hillary Clinton. The initial batch of students were fully funded by JPA scholarships which costs almost RM1 million per degree compared to less than RM500,000 for a medical degree in a local private university. The collaboration with Johns Hopkins collapsed in 2014 arising from disputes over payments from Perdana University to Johns Hopkins.

    Bank Negara will most definitely face similar challenges in having to stump up generous scholarships in order to attract the initial batch of students, and this could create a vicious cycle which will be unsustainable.

    Starting a business school is not a cheap endeavour especially when one has to pay the salaries of high profile and highly qualified foreign academics who will comprise the faculty at the Asian School of Business (ASB) in Kuala Lumpur. The fact that Bank Negara has deep pockets should be even more worrying since this means that more money can be spent on this endeavour over the course of the 10 year collaboration.

    I call upon Bank Negara to cease this collaboration immediately rather than to invest millions of ringgit of its reserves in an area which it has no business being part of in the first place.

    Dr. Ong Kian Ming
    Member of Parliament for Serdang

    [1] http://www.thestar.com.my/Business/Business-News/2015/04/10/Bank-Negara-MIT-Sloan-to-set-up-business-school/?style=biz

    [2] http://www.asb.edu.my/

    [3] http://www.inceif.org/

    [4] Agensi Kaunseling dan Pengurusan Kredit (AKPK) http://www.akpk.org.my/my/

    [5] http://www.iclif.org/

    [6] http://www.universityworldnews.com/article.php?story=20110603183329570

  • The 11th Malaysia Plan is not rooted in reality, is not transparent and is far from being a game changer

    Media Statement by Dr. Ong Kian Ming, MP for Serdang, on the 21st of May, 2015

    The 11th Malaysia Plan is not rooted in reality, is not transparent and is far from being a game changer

    I am completely underwhelmed by the recently tabled 11th Malaysia Plan. I was expecting a document that would chart a new course to the status of a developed nation and beyond. What was tabled was a document that is divorced from current political and economic reality, is totally not transparent and is far from being a game changer.

    One of the key economic challenges facing the country in 2015 and 2016 is the impact of low oil and gas prices on public finances. The unexpected and rapid fall in the price of oil to below US$40 per barrel at the end of 2014 forced the Prime Minister to announce some expenditure revisions at the beginning of the year. With the expectation of oil prices hovering below US$100 per barrel and low gas prices as a result of the increased production of shale gas in the United States, the revenue which the government derives from oil related sources – the petroleum tax, the income tax and the special dividend from Petronas – is expected to take a significant hit. Without a significant revision of long term government spending and without an increase in the recently introduced Goods and Service Tax (GST), I don’t see how the government can realistically expect to eradicate the budget deficit and the government debt to GDP ratio to below 45% by 2020.

    If government spending has not been adjusted to face the new economic realities of a low priced oil and gas regime, what more the other aspects of this plan?

    In my 11th Malaysia Plan wish list, published yesterday[1], I noted the importance of giving an honest picture of the country’s public expenditure and the need to highlight off-budget expenditure items as well as projected expenditure under public private partnership projects. I also asked for the full list of new development and infrastructure projects and the expected costs of each project in the 11th MP to be made available online. Sadly, no such list was produced. So we remain in the dark as to the number and location of new hospitals, schools, universities, technical and technical institutions which will be built under the 11th MP.

    The lack of transparency is all the more disappointing given that the Treasury is able to produce yearly estimates of budget expenditure by ministry during each budget session but the Economic Planning Unit (EPU) is not able to do the same in the 11th MP. In addition, I have received parliamentary replies in the previous sessions which have stated new projects and budget allocations that are specified to be under the 11th MP such as road upgrading projects. So much for more transparent government expenditure.

    Finally, the thrusts which are introduced as game changers in the 11th MP are not too far from business as usual. For example, the plan talks about ‘investing in competitive cities’ as a game changer but fails to outline specific proposals to give more power and financing to the local and city councils to achieve this aim. The plan talks about ‘uplifting B40 households towards a middle-class society” but says nothing substantive about reducing our dependence on foreign labour which continues to drag down the wages and job opportunities for low income Malaysians.

    The only positive point that is consistent with my wish list is the commitment to publish a multidimensional poverty index (MPI) in order to have a more comprehensive definition of poverty. But this is scant consolation in a context where all of the other wish list items have been ignored.

    Dr. Ong Kian Ming
    Member of Parliament for Serdang

    [1] http://ongkianming.com/2015/05/20/press-statement-wish-list-for-the-11th-malaysian-plan/

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