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

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?

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