FGV’s ills go beyond accounting standards
Saturday, 28 February 2015
FELDA Global Ventures Holdings Bhd’s (FGV) worst enemy is turning out to be the new accounting standards, so say the top executives of the plantation giant that draws more attention for its political prowess than commercial interest. But is this really the case, or is the suffering of the plantation company now due to the lack of medication and care rendered to the plantation assets and related investments when it was under Felda? And is it because FGV is viewed as a political entity rather than a listed company?
Right from the beginning, FGV was a tricky listing proposition because it had some elements that would not have gone down well by normal commercial standards. An example is the age profile of its trees, which is 20 years and above that forms some 50% of its total plantation assets.It had a downstream crushing plant in Canada that was bleeding so bad that it brought down the entire operations of the division. Any other ordinary plantation group would have replanted the ageing trees and sold the Canadian crushing plant long before going for a listing.
But no, this did not apply to FGV.
No matter how professionally the management of FGV conducts its business, it will always be associated with the Felda settlers, who form the bastion of support for the Barisan Nasional ruling coalition and decide the fate of some 54 parliamentary and 92 state seats.
So, when FGV announced that its net profit for the final quarter of 2014 to end-December was a mere RM20mil, it certainly struck a chord with some people.
The poor FGV executives were then left explaining once again why the numbers were low when operations of the company had improved compared with 2013. The explanation given was that under the rules of “fair value accounting”, the company is compelled to make provisions for its land lease agreement (LLA).
The amount that FGV has to provide is based on the present value of the plantation land that FGV leases from its parent company, Felda, and takes into account its future cash flow for the remaining lease period based on crude palm oil (CPO) prices today.
It does sound convoluted, right?
Well, FGV is the only plantation company subjected to such rules on Bursa Malaysia because the 355,864ha of plantation under its belt are leased from Felda. In return, Felda gets almost RM250mil per year and a 15% share of the operating profit from the sale of the fresh fruit bunches (FFB) of the land.
Apart from the land leased from Felda, FGV also buys the FFB from the 479,760ha that are owned and managed by the settlers.
There are settlers who prefer to sell their FFB to third-party palm oil mills instead of FGV’s facilities due to a host of reasons, including avoiding payment of debts that they owe Felda.
But that is a story for another day.
Coming back to FGV’s accounts, because of the LLA charges, executives of FGV have to go to great lengths to tell analysts and journalists that the eventual profit or loss number reflected in its financial statement is not reflective of the true situation of the company.
That’s true. For instance, in 2014, FGV’s cash-generating indicators such as the operating profit and earnings before interest, tax, depreciation and amortisation (EBITDA) were improving. The operating profit was at RM1.03bil, while EBITDA was at RM1.52bil.
The great lengths that the FGV executives went to explain the unique accounting situation that the company is in brought back memories of the case of Malaysia Airlines (MAS), when it was hit by losses due to fuel-hedging options in 2011 and 2012.
Under the accounting standards, it had to mark-to-market the value of its options every quarter and the gains or losses had to be reflected in the quarterly results.
MAS executives at their results briefings always tried to impress investors that the key statistics to look at were the operating profit and EBITDA of the company because they better reflected its cash-flow position.
But look at MAS today. It had to be taken private because the airline could not compete with the changing environment that called for leaner and more nimble structures.
Between June 2001 and 2014, under Khazanah Nasional Bhd – its major shareholder – MAS had accumulated losses of RM8.4bil and the Government had to pump in some RM17.4bil.
But FGV operates in a much better environment compared to the airline industry. There is competition, but the environment is more predictable. For any plantation company, survival is all about keeping costs low and maintaining the plantations with enough fertiliser so that the production of FFB is healthy.
Plantations where the trees have turned yellow are a sign that the owners are not putting in enough fertiliser.
FGV’s CPO production cost after milling is RM1,397 per tonne, an improvement compared with RM1,457 per tonne in 2013. But it is still far from the likes of IOI Corp Bhd and Kuala Lumpur Kepong Bhd, whose costs ex-mill is less than RM1,200.
Apart from cost, FGV is saddled with assets that need an enormous amount of rehabilitation work.
Some 46% of its plantations are trees with an age profile of 20 years and above, where the yields are poor. The proportion was 57% a year ago, and has dropped largely because FGV acquired two major plantations where the trees were younger last year.
This is an inherited problem. For years, when the plantations were under Felda, replanting had not been done. Now, the rehabilitation work will take a long time.
Another area where FGV is bleeding is in its downstream operations, especially the crushing plant in Canada. The plant is bleeding so bad that the losses before tax of RM125mil for the entire downstream division last year was largely due to the Canadian operations.
Who made the decision to build the plant and what was the rationale?
FGV had raised proceeds of some RM4.5bil from its listing in 2012. It acquired a few assets and is left now with some RM446mil.
One of the largest purchases was Asian Plantations Ltd, amounting to RM568mil. However, earnings from that asset will only be reflected in 2017.
Would a normal listed entity get away with spending RM4bil over two years and still having to convince analysts and investors alike of its business case? Highly unlikely