Photographer: Goh Seng Chong/Bloomberg

Planter’s Son Turns Worst Malaysia Stock to Best in 120 Days

  • Felda plans asset sale as palm oil output drops on El Nino
  • CEO see palm oil prices averaging up to 2,500 ringgit per ton

In Zakaria Arshad’s first four months at the helm of Felda Global Ventures Holdings Bhd, the world’s top crude palm oil producer has turned into Malaysia’s best stock from its worst.

While the company’s 28 percent surge this quarter makes it the best performer on a gauge of Malaysia’s top 100 companies, Zakaria, who took over as chief executive officer on April 1, isn’t resting easy. The shares are still 57 percent below their listing price in 2012, when it was the world’s third-biggest initial public offering that year, a slump the 56-year-old says keeps him awake at night.

Zakaria, a plantation settler’s son, is pressing on with plans to sell assets and cut costs as drought reduces the company’s output of crude palm oil, used in everything from food items to cosmetics. While weather forecasters predict a La Nina may develop later this year, bringing rain to parched plantations, oil palms are still struggling to recover from one of the strongest El Ninos on record that starved crops of water.

“I’m not satisfied with the share price, there’s still a long way more to go,” Zakaria said in his 45th-floor office at Felda’s headquarters opposite the iconic Kuala Lumpur Petronas Twin Towers. “My yields will be reducing, I have to look at my cost of production, and I have to cut all these costs.”

Felda posted a 65.5 million ringgit ($16.2 million) first-quarter loss from a 3.6 million ringgit profit a year earlier as dry weather hurt crops and production costs climbed. The stock slumped 62 percent from 2014 until its removal from FTSE Bursa Malaysia KLCI Index on June 22, 2015, making it the worst performer on the nation’s benchmark gauge for that period. It’s set to release second-quarter earnings later this month. Shares closed unchanged at 1.95 ringgit in Kuala Lumpur on Monday, near a nine-month high reached on Aug. 3.

Stressed Trees

Malaysia’s first-half crude palm oil production was the lowest since 2007, according to Malaysian Palm Oil Board data. Even as output may increase 3.9 percent in July, it will still be the lowest for the month in six years. Malaysia is the world’s biggest palm grower after Indonesia and the two together make up around 86 percent of global supply.

Felda’s fresh fruit bunch production fell as much as 20 percent in the second quarter from a year earlier, Zakaria said. The company’s full-year crude palm oil output may drop by 10 percent to 15 percent this year, he said. Total Malaysian crude palm oil production will be 17 million tons to 18 million tons in 2016 from a record 19.97 million tons in 2015, according to Zakaria.

“Production is catching up, though still slowly” after drought caused “very, very bad” stress to oil palms, he said. Zakaria grew up tending to palm trees in Felda Palong 1, one the company’s estates about 150 kilometers southeast of Kuala Lumpur. The estate is part of a government agency program mooted six decades ago to empower smallholders and promote agriculture activities.

Benchmark Malaysian palm oil futures, which set the tone for global prices, may average 2,400 ringgit to 2,500 ringgit a ton in 2016 from 2,235 ringgit in 2015, according to Zakaria. Prices may rise further if an extreme La Nina forms and disrupts the supply of soybeans, a competing oilseed, he said. Futures rose 1.3 percent to 2,439 ringgit on Bursa Malaysia Derivatives on Monday, trimming this year’s decline to 1.8 percent.

Asset Sale

Felda is continuing its plan to sell off non-core assets including a stake in an insurance company, Zakaria said, without giving details, while also selling loss-making units and land that doesn’t complement its business.

“I want to raise my cash reserve, sometimes it is easy to catch the opportunity with cash in hand,” he said. Its reserves were 2.4 billion ringgit at the end of March from as much as 6 billion ringgit when it was first listed after several acquisitions. It is trading at 1.1 times its book value, about 50 percent cheaper than the Bursa Malaysia Plantation Index three-year-average. It had 5.4 billion ringgit of borrowings as of end-March.

The company has a lot of potential to unlock and its share price is attractive, Ivy Ng, an analyst at CIMB Bank Bhd. said in a July 31 report. Ng, who is top ranked and has returned 63 percent for her call on Felda, has the only buy call out of 14 analyst recommendations, according to Bloomberg data.

“Perception is improving and people are seeing that we are more focused on the business,” Zakaria said. “We must make sure that we improve on our bottom line.”

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