AmBank Research expects Bank Negara Malaysia
The Ministry of Economic Affairs has released the white paper containing the forensic studies conducted by Erst & Young on eight of FELDA’s investments.
The paper reveals the discrepancies, the lack of due dilligence and poor risk management by FELDA’s board when making its investment decisions.
In the spotlight would be Case 1, which is FELDA’s investment in PT Eagle High Plantations Tbk (EHP).
In Dec 2015, FELDA’s board of directors approved the acquisition of exchangeable bonds’for shares in (EHP) via FIC Properties Sdn Bhd (FPSB) for RM505.4mil.
On Oct 16, 2016, FELDA’s board approved the change of structure in the investment in EHP to a 37% stock acquisition instead, but at the same value of US$505.4mil. FELDA would make this acquisition from a private company in Indonesia (Company A1) and came with a put option.
FPSB signed an Sales & Purchase agreement on Dec 31, 2016. The Ministry of Finance (MoF) was also involved in this investment process as they gave advice on the stucturing of the investment.
This acquisition was paid via a loan amounting to RM2.3bil from GOVCO Holdings Bhd, which is a company under MoF.
A corporate guarantee was given by FELDA at a rate of ‘cost of financing plus 15 basis points. This loan would need to be repaid in seven years.
Checks show that Company A1 had already gotten EHP shares on Nov 2014 at a price of US$0.0247/IDR300 per share.
FELDA would be able to recoup its investment amount and profit at a rate of 6% a year on Year 5 from Company A1 via the ‘put option’/
The put option could be triggered if any of the below took place:
1. EHP goes against its obligation to abide by the Roundtable on Sustainable Oil Palm (RSPO).
2. EHP fails to get its RSPO certification within two years.
3. Company A1 commits a material breach
4. Should Company A1 or the major shareholder of company A1 or EHP initiate or consents to judicial proceedings relation to itself under any applicable liquidation, insolvency, composition, reorganisation . . “
Key findings:
1. The acquisition price was higher than the market price.
2. The acquisition of EHP shares at US$505mil (US$0.043/IDR584 per share) on Dec 23, 2016 was way higher than two independent valuation prices of US$264mil and US$404mil.
3. The acquisition price was 95.86% higher compared to EHP’s market price on the date of the acquisition.
4. Another finding showed that when FELDA’s board approved the acquisition of EHP shares via a special purpose vehicle at the same price on Dec 7, 2017, EHP’s market price was even lower then at US$0.0098/IDR135 per share. This means
that FELDA agreed to buy EHP shares 344.12% higher than its market price at that time.
5. EHP’s market price on April 4, 2019 was only US$0.012/IDR176.
6. There is an impairment of value of RM1.58bil for Felda’s financial year ended Dec 31, 2017 via the entry ‘Fair value through profit or loss’.
Furthermore, the investment in EHP goes against FELDA’s investing principles.
This is because the acquisition of EHP shares, even with the put option, would have only given a return of 6% a year. FELDA’s investing principles calls for a minimum return that is higher than the average market return rate.
Besides that, the net return of 1.05% a year was also lower than the minimum fix rate of 1.15% set by Felda’s board. As of Dec 31, 2017, that net return had dropped to 0.9%.
There is also no evidence to show that a credit assessment was conducted by FELDA on company A1 in 2016, with regards to its ability to repay the full investment via the put option, should that scenario take place.
Thus, the board of directors in FELDA had approved the investment in EHP despite knowing that:
1. The board of directors in FGV and FIC did not support the acuquisition due to its high high valuations.
2. The acquisition price was US$241mil higher than its market price from the assessment report.
3. Shares in EHP had dropped 41.6% from June 11, 2015 to Oct 15, 2015.
4. Bank Negara had issued many questions with regards to the investment structure, benefits of the acquisition and the usage of capital.
Despite knowing the risks involved, FELDA’s board had approved this investment without additional due diligence and without any explanation during its minute meeting.
Lastly, FELDA’s financial statements for Dec 31, 2017 with regards to the EHP investment may not be accurate. FELDA’s consolidated accounts should reflect this investment as an investment in an allied company.
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