KUALA LUMPUR – CGS-CIMB Research expects the Federal Land Development Authority (Felda) to not pursue the termination of its land lease agreement (LLA) with FGV Holdings Bhd if the compensation is as high as RM3.5 billion to RM4 billion as per deemed by the latter.
“Given this, it may be cheaper to take FGV private at the current market capitalisation.
“The cost for Felda to take over the remaining stake it does not own in FGV is RM2.6 billion based on FGV’s last market capitalisation,” the research house said in a note today.
On October 28, Minister in the Prime Minister's Department (Economy) Datuk Seri Mustapa Mohamed said the Cabinet has agreed to the recommendation that Felda terminates its LLA with FGV Holdings.
However, he did not mention the compensation sum that Felda would need to pay to FGV, in which it holds a 33.66% stake, as a result of the LLA termination.
FGV had said that the expected compensation amount might range between RM3.5 billion and RM4.3 billion based on its internal assessment of its financial performance in 2020 and 2021, and other various factors.
CGS-CIMB Research said the compensation sum would be highly dependent on the financial year used for its calculation.
If it is based on FGV's 2019 financials, the compensation would likely be low or minimal, whereas if it is based on its 2020 or 2021 financials, it would likely be higher, but the final amount would be dependent on the performances of FGV's estates and crude palm oil prices.
“The key decider on whether the potential LLA termination is positive or negative for FGV hinges on the compensation sum to be agreed upon.
“We are of the view that the amount FGV expects is optimistic, given the historical trends of LLA payments and our current understanding of the compensation formula,” it said.
CGS-CIMB Research expects the estates under the LLA to be worth RM2.55 billion or 70 sen per share.
“For the medium to long term, we see the LLA termination as a negative as it means FGV will not be able to enjoy the fruits of its replanting over the past years,” it added.
The research firm has maintained its “neutral” call on FGV with a target price of RM1.21 per share. – Bernama, November 2, 2020
