Felda Listing Game Explained! IPO Price May Drop!!
After spending the last couple of days pouring over the FELDA IPO listing document, we can finally piece together this entire deal and reveal the true secrets that are being with held from the public.
Ok, there is a lot to cover, so lets get right to it
What Actually is Happening
Let's start with this story about a company called Felda Global Ventures Sdn Bhd (FGVH). We shall call it Najib's Felda from now on. Technically, this company is owned by the taxpayers through the Government of Malaysia, in reality its owned by Najib, Rosmah and "other Super Puteras."
This company was initially acting as the ownership vehicle of the Government's 49% stake in Felda Holdings, where the remaining 51% of the stake was owned by the settlers through Koperasi Permodalan Felda.
We shall call this "Ma' Felda" because that is the Felda we all know.
So Najib Felda - BAD, Ma Felda, owned by the setllers, GOOD.
Ok got it?
Najib's Felda then was supposed to manage the overseas business, including the production of fatty acids and food oil in North America. They did this through a company called Twin Rivers Technologies, which made investments in plants and others stuff in US and Canada. Collectively, this business has lost RM 700 m pre tax since 2009. This was mentioned by Anwar Ibrahim a couple of months ago and is a fact!
|No so-po story is ever complete|
Najib's Felda then bought Ma' Felda's investment in a JV with the IFFCO Group, a food conglomerate from Saudi Arabia, for RM 145 m . This JV is involved refining, processing and packing of palm oil based products. This business too is now performing poorly and the investment had to be impaired in 2011 for RM 29m.
So far, this business has been making losses, but their first big break happened when they took over Robert Kuok's sugar business from Perlis Plantation Berhad for about RM 1 billion. This deal was executed in January 2010. Najib's Felda then went on to acquire other sugar business assets, and in June 2011, they listed the entire group on the KLSE Exchange under a company called Malaysian Sugar Mills. When they listed, they sold down their ownership to 51% and made about RM 300 million flipping these business. Of course, the bottom line of this sugar business they were helped by Najib's Gomen increasing sugar price.
There were other things Najib's Felda bought, such as a 20% stake in Tradewinds (Al Bukharry) and a JV with Lembaga Tabung Haji in Indonesia through a company called Trurich. Collectively, they spent RM 300m on these acquisitions.
This was how the structure stood until Najib decided to put in play the plan to raise money for the General Election. Originally, the deal proposed was for a Reverse Take Over where FGVH would issue new shares to take over the control of Felda Holdings. We described this in great detail over here.
However, the settlers felt uncomfortable with the deal and it was killed. We congratulate Dato Dzul, the ex Director General of "Ma Felda" for standing up to political pressure!
Then Najib did something which the settlers still do not quite understand. He basically moved a major asset that was in control of the Government, which was 343,000 hectares of palm oil estate, that was originally managed via Felda Plantations to Najib's Felda. In return Najib's Felda will rent the land from the Government for about RM 700 per hectare per year - a super cheap price. With this deal in place, Najib's Felda has increased its worth by RM 10 billion!
Just to give you a kind feel for the numbers, when Boustead Holdings, rents its plantation land for about RM 3,300 per hectare! So what Najib has done was to raise money by selling out Government owned land!
The impact of this was deal is what makes the entire listing possible. With this deal, Najib's Felda can list and raise enough money to fund the General Election. They are targeting to raise RM 10 billion, of which RM 1 billion has been paid out to settlers via "durian runtuh" scheme.
That is the essence of this deal. Once again, we will never know how the money raised by Najib's Felda by selling out government controlled land to the capitalists will be used. This is the entire economic structure of this deal.
FELDA SETTLERS JAMMED
The settlers will also be jammed by this deal. Previously, a lot of the profits from Felda Holdings ('Ma Felda') came about through the management of the Government's plantation estate. Now this asset has been passed to Najib's Felda, which will materially impact the future dividends from Felda Holdings.
page 685 of listing document
(iii) The management agreement between Felda Plantation Sdn Bhd ('FPSB'), a subsidiary of the Group, and FELDA ("Gomen/Najib") expired on 31 December 2011 and was not renewed. On 1 January 2012, FPSB therefore ceased from being the management agent for FELDA. On 6 January 2012, FPSB entered into a management agreement with Felda Global Ventures Plantations (Malaysia) Sdn Bhd ('FGVPM') for the management of FGVPM's plantation estates, which were leased from FELDA. This agreement is effective for a duration of one month, with a monthly renewal and can be renewed through written notification within 7 days before the expiration of the management agreement. This management agreement expired on 29 February 2012 and subsequently, the employees of FPSB were transferred to FGVPM.
That is why the old management of Felda under Dato Dzul was opposed to this deal!
Ok - the rest of this article is for the capitalists
HOW MUCH IS IT WORTH
So how much is the share actually worth. Ok, here is my estimate about RM 3.24
Ok it is a very rough calculation, but I'll go with you on how its constructed. Lets focus on the 2 most important parts - the value of 51% of MSM Holdings and the value of the land rembat "deal".
Value of 51% of MSM Holdings : Well, that's easy. Just go and look up the price of MSM and multiply by the number of shares outstanding x 51%
= 700 m X RM 5.30 X 51% = RM 1.9 billion
(Poor Robert Kuok - that's why he was pissed at the Gomen, Najib's Felda only invested RM 1 billion and can make RM 2.2 billion - they made RM 300m by selling down last year and now the remaining is worth RM 1.9 billion )
Value of 330,00+ Hectares Leased At RM 700/Hectare
Ok this required a bit of art. There are a couple things to consider, number one what is the current yield on the land and number two, what is the operating profit from harvesting the fruits.
We did some digging around and came up with this chart
We considered a couple of folk - "Najib's Felda's Land", Golden Agricultural Resources (GAR), KLK Kepong and IOI. These are all super producers, who are able to generate more than 3 Million MetricTonnes of Fresh Fruit Bunch (FFB) a year. For those who do not know what happens its like this. You plant a an oil palm tree, and the fruit is collected in bunches, hence its called Fresh Fruit Bunch
They then process the Fresh Fruit Bunch to yield Crude Palm Oil, with a yield of about 20%.
As it is clearly shown, Najib's Felda, whilst being the largest Fresh Fruit Bunch producer in Malaysia (not shown in graph), has quite a low productivity and profitability. This fact is very important and will be a key determinant in coming out with a valuation.
But why is it so ?
Well consider the next chart
This is a comparison of the Age Profile of the Oil Palm trees in Najib's Felda versus that of Golden Agricultural Resources. As you notice, Najib's Felda's holding consists of over 51% of trees that are old. This means the trees are much taller and makes it expensive to harvest the fruit. This increases the cost and reduces the profitability.
But more importantly, is that each year goes by, Najib's Felda loses about RM 500 million worth in its estate because of such a huge skew towards these older trees. This is different when compared to Golden Agricultures which gains approximately RM 3 billion a year because their stock is moving towards maturity.
You can perhaps understand this from this chart
The chart is roughly ok, only thing that the decline is much more sever for oil palm.
Ok, right now Golden Agricultures trades for about 8.3 x EBIDTA. Furthemore Golden Agriculture Resources is a super king , with other very profitable businesses. I'll be generous and give Najib's Felda a multiple of 6.00x . To me, there is no way it can get a multiple about GAR because of the reasons I have mentioned above.
So when we can get the value like this
2011 Plantation EBIDTA Earnings x 6.00 = RM 9.7 billion.
ENTERPRISE VALUE AND EQUITY VALUE
The remainder of this technique is to add all the parts together. This gives a total enterprise value of RM 13 billion. To that we deduct the debt of RM 1.8 billion - giving an equity value of RM 11 billion++. Divide that by the number of shares, and you get a fair value about RM 3.24.
So its not really such a great deal, and don't lose sleep if you don't get a blue share.
More importantly, this deal seems to be priced on the high end for the retail investors, and with the large float there will be immediate selling pressure, especially leading up to the general election