03 May 2012
Felda IPO Update: 53% of total 323,587ha of oil palm estates in Malaysia consist of oil palm trees that are more than 21 years old, to spend an estimated RM 2.6 billion on replanting over the next 5 years - OSK Research
Felda Global Ventures Holdings Bhd’s (FGVHB) upcoming IPO, touted as Asia’s biggest this year, may not get the robust response many expect, analysts said.
For one, a large part of FGVHB’s plantations is old and needs to be replanted, leading to high costs.
According to its draft prospectus, FGVHB had 323,587ha of oil palm estates in Malaysia, of which 53% consist of oil palm trees that are more than 21 years old. Oil palm trees have an average life of 25 years, plantation industry experts note.
“The replanting will keep FGVHB’s profitability under pressure as replanting costs are charged to profit and loss under Malaysia’s accounting practice. From our understanding, the cost of replanting is similar to the cost of greenfield development, which is around RM15,000 per hectare up to maturity, spread over three years,” OSK Investment Bank said in a report last Tuesday
“This means FGVHB will need to spend about RM2.6 billion on replanting over the next five years,” the report said.
Lacking a robust growth story, analysts believe that FGVHB’s IPO may not attract the strong response Bumitama Agri Ltd did in Singapore last month.
Felda Global has 323,587ha of oil palm estates in Malaysia with 53% of oil palm trees more than 21 years old.
Bumitama’s IPO was oversubscribed by more than 30 times. On its first day of trading, Bumitama shares closed at a 27.5% premium to its IPO offer price.
To compare the growth potential, 71.9% of Bumitama’s total planted area of 119,162ha is made up of immature and young plants. The rest are at the prime age of 7 to 18 years. The company also owns 72,786ha of plantation land waiting to be planted.
In contrast, 30.7% of FGVHB’s planted area is made up of immature and young trees. Trees from the age of 10 to 20 years account for 16.4% and roughly 52.9% of the planted area was of old trees.
However, observers noted that FGVHB is still one of the leading global plantations players with advantages in economies of scale.
In terms of mature oil palm planted, Frost & Sullivan said FGVHB was the world’s third largest player in 2011 with 288,442ha of mature planted area after Sime Darby Bhd (468,668ha), Golden Agri-Resources Ltd (390,759ha), PT Astra Agro Lestari Tbk (217,343ha), and Wilmar International Ltd (216,623ha).
In terms of CPO production, FGVHB produced about 3.3 million tonnes making it the world’s leading producer, followed by Sime Darby (2.4 million tonnes), Golden Agri-Resources (2.2 million tonnes) Wilmar (1.8 million tonnes) and PT Astra Agro (1.3 million tonnes).
FGVHB also owns a 51% stake in MSM Holdings Bhd, the leading refined sugar producer in Malaysia, which contributed 29.4% to its revenue in 2011.
In 2011, FGVHB posted a net profit (after minority interest) of RM942.18 million on the back of RM7.47 billion in revenue. Based on its post-listing share base of 3.65 billion, this translates into an earnings per share (EPS) of about 26 sen.
FGVHB has not announced its IPO price yet, but observers believe that it will be priced based on a historical price-earnings ratio (PER) of its peers in the region.
According to analysts who track the plantation sector, the top plantation players listed in Malaysia, Singapore, and Indonesia had an average PER of around 15 times over the last few years.
On this assumption, the analyst said FGVHB offer price will be around RM3.90. FGVHB will offer up to 2.19 billion shares under its IPO, which is scheduled in June.