Felda Taps $2 Billion Cash Pile to Expand Abroad: Southeast Asia

Felda Taps $2 Billion Cash Pile to Expand Abroad
Workers sort bunches of harvested oil palm fruit at the Felda Global Ventures Holdings Bhd. palm oil plant in Besout, Perak, Malaysia. Photographer: Goh Seng Chong/Bloomberg

Felda Global Ventures Holdings Bhd., the world’s third-largest manager of palm oil plantations, plans to tap its 6.2 billion ringgit ($2 billion) cash pile to expand abroad as Malaysia runs short of available land.

Felda, which completed the world’s third-largest initial public offering in 2012, will take advantage of lower prices to buy more land in neighboring Indonesia this year, start rubber processing in Myanmar and form a port storage joint venture in West Africa, Chief Executive Officer Sabri Ahmad said.

“Prices of plantations are more reasonable now,” Sabri said in an interview in Kuala Lumpur, where the company is based, on June 14. “There are potential opportunities.”

Malaysia has reached the limit of land it can use for palm cultivation. While output of the edible oil can grow through higher productivity, it may not increase much above today’s levels, the government said March 5. A tripling in palm oil prices from 2006 to March 2008 drove Southeast Asian planters to expand abroad, spurring Sime Darby Bhd. and Golden Agri-Resources Ltd., the world’s top two palm oil producers, to turn to new countries with suitable climates such as Liberia.

Felda raised $3.3 billion in its share sale in June last year, with demand from institutions exceeding supply by more than 40 times. After jumping 16 percent in its debut, the stock has slipped and closed at its offer price of 4.55 ringgit today. Sime Darby dropped 3.7 percent during the same period, while Kuala Lumpur Kepong Bhd. fell 6.7 percent as palm oil prices slumped about 18 percent.

Sell Calls

Slower growth in China and recessions in Europe crimped demand for the world’s most-used cooking oil, hurting prices and pushing inventory to record highs in Malaysia and Indonesia at the start of this year. Palm oil futures for delivery in August gained 1 percent to 2,464 ringgit a ton as of 5:06 p.m. in Kuala Lumpur trading today.

Futures may trade at 2,400 ringgit to 2,600 ringgit a metric ton for the rest of this year, said Sabri, who will step aside as CEO on July 15 and be replaced by Mohammed Emir Mavani Abdullah. This is lower than his forecast of 2,500 ringgit to 2,800 ringgit in February.

Felda is rated the equivalent of sell by 12 out of 20 analysts at banks including Deutsche Bank AG and Credit Suisse Group AG, according to data compiled by Bloomberg. Its outlook is “challenging” due to its replanting program of 15,000 hectares (37,065 acres) per annum, Arhnue Tan, an analyst at Alliance Bank Bhd., wrote in a May 30 report.

IPO Cash

Lower palm oil prices have hurt producers’ earnings, with Sime Darby reporting a 21 percent drop in third-quarter profit. Felda Global’s first-quarter net income fell 29 percent to 136.7 million ringgit from a year earlier, it said May 29.

The stock trades 20.6 times earnings, compared with an average 32.2 times for 38 agricultural product makers listed in Kuala Lumpur, according to data compiled by Bloomberg.

“If they acquire estates with a younger age profile that will help grow the business and offset some of the older trees that they need to replant,” Ivy Ng, an analyst at CIMB Investment Bank Bhd., said in a phone interview. “The cash from the IPO is currently sitting in banks. If they can buy something that gives a higher return and grow the overall business of the group in the medium term, then it’ll be positive.”

Felda plans to spend 300 million ringgit to buy and plant another 20,000 hectares of palm oil land in Indonesia’s Kalimantan province, said Sabri. Last year, the company acquired about 15,000 hectares through its 95 percent-owned PT Citra Niaga Perkasa.

Record Crop

Malaysia, the world’s second-largest producer after Indonesia, had a planted area of about 5.1 million hectares at the end of 2012, according to data from the country’s palm oil board. The Southeast Asian nation’s output may total 18.9 million tons in 2013, matching the country’s record crop in 2011, the board forecast in January.

Indonesia’s harvest may rise 9 percent this year to 28 million tons, Indonesian Palm Oil Board Chairman Derom Bangun said May 7. The two countries account for about 85 percent of global production of the commodity used in foods, cosmetics and biofuel.

Output of palm oil, which represents more than 30 percent of global cooking oil production, will expand 5 percent to 58.1 million tons in 2013-2014 after doubling since 2002, U.S. Department of Agriculture data show. Demand for palm oil is increasing globally, helping spur total world export volume of 17 major oils and fats to a record 75.65 million tons in the 2012-13 marketing year that began Oct. 1, Hamburg-based researcher Oil World said June 4.

Africa Expansion

Felda has been in talks to create a palm oil hub with storage facilities in West Africa for about a year and should reach an agreement by December, said Sabri, without giving the location. This will be used by the company for processing, packaging and distribution to the region, he said.

About a million hectares of land is available for development in the West and Central Africa region, according to Doug Hawkins, an agribusiness specialist at Hardman & Co., a London-based market research group. Singapore-based Olam International Ltd. and Wilmar International Ltd. are also expanding in the region with interests in the Ivory Coast and plans for Ghana.

Felda is awaiting investment authority approval to start downstream rubber-processing operations in Myanmar, its CEO said. The planter signed a deal in October with Pho La Min Trading Ltd. to potentially set up rubber plantations there.

Ringgit’s Rise

Demand from the biodiesel industry should cushion slowing sales to India and China, Sabri said. Malaysia may win some market share after the European Union imposed tariffs on Indonesian and Argentinian biodiesel, a type of fuel made from vegetable oils and animal fats, he said. The duties punish exporters for allegedly selling it in the EU below cost, a practice known as dumping.

“A lot of people are not importing from Indonesia and Argentina, so there’s a vacuum in terms of the palm methyl ester supply to Europe,” said Felda’s CEO. “So this is potential for our biodiesel industry to revitalize itself.”

Felda would benefit from a weaker ringgit as about 80 percent of its revenue is denominated in dollars, said Sabri. The Malaysian currency has strengthened 0.8 percent over the past year to 3.1325 per dollar.

“By the end of the year, the ringgit could be at 3.00 to the dollar,” Sabri said. “The current level is a bit of a distortion; recently it’s been very volatile.”

The ringgit is expected to strengthen to 3.05 by the end of 2013, according to the median forecast of analysts surveyed by Bloomberg.