CGS CIMB: FGV’s hope for compensation is optimistic

CGS CIMB Research opines that FGV Holdings Bhd’s (FGV) expectation of a RM3.5 bil – RM4 bil compensation from Federal Land Development Authority (Felda) following the termination of the land lease agreement (LLA) between the parties is optimistic.

The research house said its opinion is based on the historical trends of LLA payments and its current understanding of the compensation formula.

“However, we believe Felda is unlikely to pursue a termination if the compensation is as high as RM3.5 bil to RM4 bil, given that it may be cheaper to take FGV private at current market capitalisation,” it said in a note today.

CGS CIMB said the cost for Felda to take over the remaining stake it does not own in FGV is RM2.6 bil, based on FGV’s last market capitalisation.

“Our read is that 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 will likely be low or minimal, whereas if it is based on 2020 or 2021 financials, it will likely be higher, but the final amount will depend on the performances of FGV’s estates and crude palm oil prices,” it said.

The research house said it assumed the estates under the LLA to be worth RM2.55 bil.

“As such, we would view the deal as positive or negative for FGV if the compensation value is above or below our RM2.55 bil valuation for the estates.

“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 said. – Oct 31, 2020

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