The mess at FELDA

Megat Zaharuddin: I’ve been in many turnaround situations before, big and small. This is big.

ECONOMIC Affairs Minister Datuk Seri Azmin Ali says he will table a White Paper on FELDA in parliament in December. We trace how the development authority and FGV Holdings have spent billions since 2013, leaving them in dire straits today.  

In late 2013, officials from the Federal Land Development Authority (FELDA) who were in London were summoned to meet Russian businessmen who represented fertiliser giant Uralkali PJSC.

With the Russian businessmen was a Malaysian corporate player who was closely associated with a former politician. After exchanging the usual pleasantries, they got down to business. FELDA was in talks to buy a 7% stake in Uralkali for RM3.5 billion.

“It (the RM3.5 billion) was at a massive premium at the time. Thankfully, the deal didn’t go through. Some of the officials asked why we were paying such a premium and what we were going to do with 7%. Honestly, at such a premium, we could have just mopped up the 7% on the open market,” an official involved in the deal says.

A check on Bloomberg reveals that in December 2013, Uralkali’s stock traded at between 163.16  and 173.52 roubles. Today, the stock has fallen about 50% and the company’s market capitalisation stands at US$3.73 billion (RM15.49 billion), which means the 7% would have a market value of just RM1.08 billion.

“Many of FELDA’s deals are like this. No one knows why FELDA went into many of its deals,” the official adds.

FELDA similarly acquired a 37% non-controlling stake in Indonesian planter PT Eagle High Plantations Tbk from Tan Sri Peter Sondakh’s Rajawali group for US$550.4 million — which was at a massive premium — and is sitting on a huge paper loss (see accompanying story).

It is not known how much it takes to operate FELDA or what sort of expenditure the development authority incurs but what is clear is that there is no consensus on what it has done with all its money.

FELDA’s annual reports are not made public, making it difficult to gauge its financial performance and position, as well as the extent of the mismanagement and other shenanigans at the plantation outfit.

FELDA was established on July 1, 1956, under the Land Development Ordinance of 1956, with noble intentions — for the development of land and relocation, and with the objective of poverty eradication through the cultivation of oil palm and rubber.

Nevertheless, from the initial public offering of Felda Global Ventures Holdings Bhd (now FGV Holdings Bhd) in mid-2012, FELDA raised RM5.5 billion as part of its offer for sale of shares. A few years earlier, in 2009, FELDA got RM1.57 billion from the sale of its 49% stake in Felda Holdings Bhd to FGV.

It is also noteworthy that FGV has paid a total of RM1.5 billion to FELDA under its land lease agreement since its listing in 2012. Since its flotation, FGV has paid a total annual dividend per share of 50 sen to its shareholders. In FY2012 and FY2013, FELDA held 1.41 billion shares, or a 38.66% stake, in FGV but subsequently reduced its holding to 33.67%, or 1.23 billion shares. At a lower quantum of 1.23 billion shares for the entire six years, FGV has paid out RM615 million to FELDA.

Even if the durian runtuh payments to the settlers of RM1.69 billion — or RM15,000 each after FGV’s listing — were taken into account, it is still puzzling how FELDA finds itself in financial turmoil today.

According to its chairman Tan Sri Megat Zaharuddin Megat Mohd Nor, who was appointed on July 27, the outfit is drowning in debts of RM8.05 billion, and its cash flow needs to be strengthened.

Strange acquisitions

According to former associates and officials of FELDA, in mid-2013, a wholly-owned subsidiary known as Felda Investment Corp Sdn Bhd (FIC) was set up to venture into businesses other than plantations.

Checks on the Companies Commission of Malaysia’s website indicate that FIC was incorporated in early July 2013 as Capital Protocal Sdn Bhd and had its named changed to FIC in November 2013. It had a three-pronged strategy to venture into property development, hotels and facilities management (FM), namely non-plantation businesses, while FGV focused on plantations.

“The three areas were selected because there would be very little capex involved. FELDA already had land bank and hotels, while there was ready business for FM,” a former FELDA official explains.

The development authority owns five hotels under its Felda Residence brand — one each in Sg Klah and Trolak in Perak, one in Tekam in Pahang, one in Tanjung Leman in Johor and one in Kuala Terengganu. Thus, managing these hotels and other properties such as the buildings in Jalan Sultan Yahya Petra (formerly Jalan Semarak) will keep the FM business busy.

FIC only needed FELDA to support its hotels through the settlers utilising its facilities. But instead of sticking to this plan, FIC acquired the Grand Plaza Serviced Apartments in Bayswater, London, for £98 million (RM500 million). Then in end-2014, it acquired the Grand Plaza Kensington Hotel in London for £60 million (RM330 million) to “diversify its investment assets”.

Recently, after revealing that the development authority’s cash flow was in dire straits, Megat Zaharuddin said he would sell the hotels. “I’ve been in many turnaround situations before, big and small. This is big. The turnaround of FELDA will need a minimum of two years,” he said.

How he expects to get a good deal for the hotels remains to be seen, as any interested buyer is likely to squeeze FELDA after its admission of being cash-strapped.

While FELDA’s financials are not available, in its financial year ended Dec 31, 2016 (FY2016), FIC suffered an after-tax loss of RM329.92 million on revenue of RM413.92 million. As at end-FY2016, it had accumulated losses of RM661.79 million, which is shocking considering that it was only set up in 2013.

As at end FY2016, FIC had non-current assets of RM3.22 billion and current assets of RM1.20 billion. It also has non-current debt commitments of RM2.68 billion and short-term borrowings of RM1.9 billion.

And FIC has not paid FELDA any dividends since it was incorporated in 2013.

IRIS and Encorp

In August 2013, just a few months after the three-pronged plan was mooted, FIC bought into IRIS Corp Bhd, taking a 25% stake for RM110.3 million via a private placement. IRIS placed out 394 million shares at 28 sen apiece.

It was a standing joke in the marketplace that FELDA officials were bragging that FIC was paid dividends of 0.45 sen per share in November — it had paid RM110.3 million for the 25% stake in IRIS and got back RM1.773 million.

And IRIS has not paid any dividends since.

It is also noteworthy that since July 2015, IRIS has never traded above 28 sen. This means that its closing price of 15 sen last Wednesday would have resulted in FIC sitting on a huge paper loss.

After the initial 25% stake, FIC acquired an additional 132.27 million shares in IRIS in mid-November 2013 via another placement at 26 sen apiece, nudging up its holding to 26.71%.

In total, FIC spent RM144.69 million on buying 26.71% of IRIS.

In April 2014, FIC sold three million IRIS shares for 33.4 sen each, another three million at 33 sen and four million at 30 sen. In other words, it made RM3.19 million from the sale of 10 million shares.

Other sales have also been below the acquisition price.

In February 2016, FIC hived off nine million shares at 20 sen apiece. It sold five million shares at 17.5 sen in March the same year, 2.5 million shares at 16.5 sen at end-April and 4.49 million shares at 17 sen in November. It disposed of 7.52 million shares at 13.1 sen in early December and let go of 55,000 shares at 13 sen on Dec 7. This means 28.56 million shares were sold for RM4.84 million.

After 2016, FIC stopped indicating the price at which it sold its shares but it has disposed of 98.95 million shares since then. It now holds a 14.6% stake, or 360.81 million shares, in IRIS.

Taking the loss made on the 14.6% block in IRIS at last Wednesday’s close of 15 sen and averaging the acquisition price at, say, 27 sen will mean that FIC is sitting on a loss of 12 sen per share, or RM43.3 million.

Another puzzling acquisition by FIC was done in early May 2014. It bought a 49.5% stake in Encorp Bhd for RM239.72 million, or RM1.55 apiece, from parties linked to Tan Sri Mohd Effendi Norwawi, triggering a general offer.

FIC and FELDA ended up with 72.27% of Encorp after forking out RM306.11 million. However, Encorp closed at 42 sen last Wednesday, which means it had lost 73% of its value and FELDA was sitting on a major paper loss of RM223.45 million. This is excluding the acquisition of Encorp’s loan stocks and warrants.

“God only knows why they (FELDA) bought into Encorp. It has very little land bank and its mall (Encorp Strand Mall) in Kota Damansara is not exactly doing well,” the former official remarks.

While Encorp’s net asset value per share in June 2014 was RM1.74, its annual report for FY2014 indicates that the company owned shoplots and office suites, small parcels of land in Selangor, 5.83 acres of freehold land held for development in Batu Ferringhi in Penang, 3.3 acres in Pulai, Johor, 0.8 acre in Canning Highway at Victoria Park in Western Australia and 2.72 acres in Perth. To put it bluntly, there was nothing substantial in Encorp for FIC to buy into.

It seems there were offers to buy the mall but Encorp’s partner in the venture, Perbadanan Kemajuan Negeri Selangor, wanted an exorbitant price.

It is noteworthy that Encorp’s second largest shareholder with 13.63% equity interest, or 40 million shares, is Anjakan Masyhur Sdn Bhd, a company linked to tycoon Tan Sri Syed Mokhtar Albukhary.

But why would Syed Mokhtar do anything for Encorp when he does not have control of the company?

Other than the above, there were other acquisitions by FIC such as the Grand Borneo Hotel in Kota Kinabalu, Sabah, for RM86 million, and non-revenue generating assets such as the construction of a training centre in Bangi for RM225 million and the stadium in Jengka for RM100 million.

It is also understood that FIC’s RM110.3 million acquisition of IRIS shares was via a loan obtained from FELDA. Other expenditure by the development authority that was reported by the media includes a RM300 million payment to the Sabah government, RM250 million to the Pahang government, RM400 million for housing for the settlers and RM883 million management expenses. Duit Raya payments for seven years from 2012 to 2018 totalled RM282.41 million.

Despite all this, there is still much that is unaccounted for at FELDA (see table).

The million dollar question is, how could a development authority like FELDA make so many bad decisions?