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An aerial view of an FGV palm oil plantation. The company drew investment from thousands of the country's small farmers in its 2012 initial public offering.(Photo courtesy of FGV)
Business Spotlight

'F should mean food': Malaysia's FGV looks beyond palm oil

Plantation owner has struggled since stock market debut but CEO wants to diversify

P PREM KUMAR, Nikkei staff writer | Malaysia

KUALA LUMPUR -- The palm plantations that FGV Holdings owns, stretching across the Malaysian landscape, make it hard to believe that the company could once boast of being in the same league as Facebook.

But that was briefly the case back in 2012 when the stock market debuts of the U.S. social media company and the Malaysian palm oil producer became two of the year's most valuable initial public offerings. Just a few months after Mark Zuckerberg raised $16 billion in a Nasdaq debut, FGV -- then known as Felda Global Ventures -- raised 10.4 billion ringgit ($2.49 billion at the current exchange rate) on the Kuala Lumpur stock exchange.

Facebook is now worth seven times its initial market capitalization. FGV? Not quite such a success story.

Since its IPO, feted as an important milestone for Malaysian capitalism, FGV's value has shrunk by about 80%. Positioned as a cash-rich company, with 5.67 billion ringgit at end-2012, FGV ended last year with cash of just 1.57 billion ringgit, while borrowings rose to over 4 billion ringgit. The company's market capitalization is now 4.34 billion ringgit.

Behind these numbers are years of bad investments, corruption allegations and lawsuits -- but a year and a half into the stewardship of CEO Haris Fadzillah Hassan, FGV is attempting to put itself on track with a different strategy, exploring new avenues in higher-margin businesses such as food production.

The "F" in FGV should be synonymous with "food," Haris said in an interview last month with Nikkei Asian Review in his office on the top floor of the company's headquarters in Kuala Lumpur. FGV wants to displace at least 20% of Malaysia's annual 60 billion ringgit of food imports. FGV already owns 51% of one of Asia's largest stand-alone sugar refiners, MSM Malaysia Holdings.

For Malaysia, the attempted reinvention of FGV is a test of the entrepreneurial drive and well-being of the country's corporate sector. Malaysia is the home of some of this year's stock market darlings such as Top Glove, the latex glove maker whose value has soared during the coronavirus pandemic. But foreign investors are just as likely to dwell on the case of former sovereign wealth fund 1Malaysia Development Berhad, which amassed heavy debts and led to various corruption charges against top management, including former Prime Minister Najib Razak.

"FGV's recovery will boost the local corporate scene and serve as an impetus to other companies when they want to diversify from their traditional business," said Haris, who was appointed in January 2019. The latest indications of his progress will come on Monday, when FGV is due to report its latest earnings.

FGV's major shareholder is a government agency, the Federal Land Development Authority, which makes loans and provides subsidies to small farmers. FELDA and associates collectively control 33.7% of the company.

FGV's diversification plan started on the right foot with an agreement last year with South Korean food manufacturer Samyang Food to explore halal food production in Malaysia. But the deal was called off earlier this year. Sources close to the transaction told Nikkei that the agreement was terminated by the Korean company after learning of the high construction and operating cost of the proposed factory. FGV did not reveal the reason for the deal's cancellation.

FGV remains on the lookout for deals to accelerate its domestic market control and strengthen its exports.

"We are currently looking to acquire local food companies with overseas presence to expand the business," said Haris, who says diversifying into businesses such as integrated farming -- with concurrent activities in crops and livestock -- is vital. "The plantation business only gives us 4% return because the cost has gone up. [In contrast] the integrated farming business could give us up to 15% return in the next three years."

Haris has also signed a joint venture in India, believing it is a market where FGV can expand, citing demand for affordable vegetable oil in the nation of 1.3 billion.

The "F" in FGV Holdings should be synonymous with "food," says CEO Haris Fadzillah Hassan. (Photo by Wong Ying Xian) 

The plans are a far cry from 2012, when FGV was synonymous with its domestic palm holdings. FGV's listing, while celebrated as a show of investor confidence in Malaysia, was also a way for the country's then-leader Najib to gain support from small plantation holders in rural areas. For the IPO, more than 110,000 FELDA small plantation holders, known as settlers, were each given a 15,000 ringgit cash bonus and 800 shares.

Investors were sold a vision of a global scale plantation company that would churn out high dividends, paying for improvements of FELDA plantation villages and funding farming and educational subsidies.

Rauzan Esa, secretary of the National FELDA Settlers' Generations Association, told Nikkei that settlers who purchased additional shares in FGV during the IPO have had to bear losses. FGV's share price peaked a week after listing at just over 6% above its IPO price of 4.55 ringgit per share; since then the direction has been largely downhill, to a low of 63.5 sen in December 2018.

"Although the government had offered incentives to settle debts incurred by the settlers to purchase FGV shares, that reflected poorly on FELDA's financials," said Rauzan. "FGV has failed to be a source of wealth for the settlers as promised before the IPO."

Subsequent years brought purchases of two plantation companies for a combined 2.2 billion ringgit, at steep prices, and allegations of financial irregularities. Confidence in the company reached a low ebb in June 2019, when a resolution to pay the company's board of directors was rejected at a shareholders' meeting. FGV has ongoing legal cases against its two previous chief executives, Emir Mavani Abdullah and Zakaria Arshad, for alleged breach of trust. The company has also sued several former directors and senior managers.

The investments made in other plantations after the IPO have proved a drag, leading to almost 1 billion ringgit in impairments in 2018. "Some companies that FGV acquired were at a premium but did not give [the promised] returns," Haris said.

Haris is the third chief executive to lead the company since its listing. Acknowledging that FGV was seen as a government agency before, Haris says he is proud to be the first CEO appointed by the company's board.

"I'm also not a board member, [in order] to maintain checks and balances between the management and the board," he said.

FGV narrowed its net loss for 2019 to 242.19 million ringgit from 1.08 billion ringgit in 2018. To streamline operations, FGV has sold about 126 million ringgit worth of assets, among 350 million ringgit of assets identified as noncore. "This year, we have plans to sell some assets worth 150 million ringgit," said Haris.

Today FGV remains a leading crude palm oil producer, responsible for over 15% of Malaysia's annual production. But Haris says profit margins are weak, pressurized by the cost of replanting and a low palm oil price.

Adding to the burden, according to the CEO, are costs associated with certifying the palm oil producers' operating standards, to counter scrutiny of the environmental and social costs of production. Allegations against producers from Malaysia and Indonesia include illegal deforestation, health hazards and illicit labor.

Palm oil producers must be certified by an international body -- the Roundtable on Sustainable Palm Oil (RSPO). Malaysia also developed a local oil palm certification program, the Malaysian Sustainable Palm Oil (MSPO), which follows processes similar to RSPO's. "All our mills and oil palms estates are 100% MSPO certified, but we are still halfway in RSPO certification," Haris said.

In January, the RSPO's complaints panel suspended certification for all uncertified units of FGV, citing issues with the way the company recruits foreign workers. FGV has appealed the suspension.

Integral to Haris's vision for expanding FGV's food business is its oil and fats production facility in Pasir Gudang, at the southern tip of peninsular Malaysia opposite Singapore. The 4-hectare site is where it has made Saji, its flagship cooking oil brand, which since its launch in 2003 has captured about one-third of the domestic market. FGV believes the brand can be exploited further and help its push into the food industry.

Saji cooking oil sells well in Malaysia for FGV, which wants to raise its profile in food products. (Photo by P Prem Kumar) 

"During the coronavirus lockdown period, we saw a spike of 30% for consumer products, including our cooking oil and margarine," plant manager Shamsudin Hasan told Nikkei. "The plant was running almost seven days a week to cater to the demand." FGV has also seen rising demand for cooking oil from other Southeast Asian countries, and as far away as Central Asia, Shamsudin said.

Besides cooking oil and margarine, FGV also uses third-party manufacturers to make instant noodles, mayonnaise and creamer for supermarkets nationwide.

As for expanding its integrated farming business, FGV is doing more to use palm kernel expeller, a byproduct of palm oil extraction, to produce animal feed. "We have launched dairy cattle and goat pellets to date. We see huge potential in this segment," Haris said. FGV has also ventured into dairy farming and fresh milk processing via its 60% stake in Red Agri, a local manufacturer.

And in India FGV signed a 70-30 joint-venture agreement with Indian company Pre Unique Private Limited, which is principally involved in oil palm and power plant businesses. The agreement would "localize" FGV in India, said Haris. A local company will be "vital for FGV to survive in case the Indian government decides to impose higher import tariffs on palm oil," he said.

Ivy Ng, CGS-CIMB Securities' regional agribusiness analyst and head of research for Malaysia, said she was skeptical of FGV's chances of success in India. "Most Malaysian companies [that have] ventured into India have only had limited success. It will depend partly on the joint-venture partner," she said.

FGV's financial statements still show that plantations and sugar account for 97% of revenue. Khoo Zhen Ye, a plantation analyst with MIDF Investment Bank, said that while he is positive on FGV's diversification strategy, "the well-being of the group is still largely dependent on its crude palm oil and sugar segment." These were loss-making in the first quarter.

Haris acknowledged that FGV had to pursue changes with care. "Plantation is a capital-intensive business and we are aware of the risk we are taking to balance both our core plantation business with the food business," he said.

But while transformation will take time -- and it is a fair bet FGV's days of being ranked just behind Facebook are gone -- he is confident of proving the pundits wrong. "FGV has had historical reasons for its current situation, but that will remain in history," he said.

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