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/