The D in ABCD for FGV

Much has been said of FGVH's MOU with Louis Dreyfus and Vitol, whether they are the right fit, right culture, right partner. Here I have listed the facts:

1. Louis Dreyfus

Louis Dreyfus Group is a diversified French private holding company that is involved in agriculture, oil, energy and commodities (global processing, trading and merchandising), as well as international shipping. It is one of the world’s four traditional agricultural giants, which are known by their initials: ABCD - Archer Daniels Midland Co., Bunge Ltd. and Cargill Inc. and Louis Dreyfus.

The company has 34,000-plus employees in more than 55 countries and posted $74.3 billion in 2010 revenue. Louis Dreyfus is the biggest fund manager in agriculture futures; the No. 2 wheat, corn and sugar trader; the third-largest coffee seller and juice processor; and a major farmer and biofuel processor.

Margarita Louis-Dreyfus, the Russian wife of the previous Chairman, is the current Chairman of Louis Dreyfus Group and the largest shareholder via the Family Trust with a 65% stake in the parent Louis Dreyfus Holdings. The day-to-day operation is run by Serge Schoen, a German.

The commodities unit generated 62 percent of the holding company’s 2010 revenue and about 80 percent of its $892 million profit. Louis Dreyfus is a global entity and has had dealings in the past with many countries with Muslim majority populations.

Three key points

1. Louis Dreyfus supplies 30% of the rice requirements in Africa and 10% of grains requirements in the Middle East and Africa. It does not discriminate between Muslim or non-Muslim countries and see their role purely as providing commodities including food to the global population.

2. Loius Dreyfus has established presence in OIC member states. Their commodities division has registered offices in the following countries:-

-          PT. LOUIS DREYFUS COMMODITIES INDONESIA PLC. – Indonesia

-          LOUIS DREYFUS COMMODITIES MEA TRADING DMCC – UAE

-          LOUIS DREYFUS COMMODITIES ALEXANDRIA LTD - Egypt

3. Malaysia must have a more globalised outlook and engage aggressively in global trade. FGVH MOU with Louis Dreyfus looks to immediately open up new markets for business expansion.

2. The Vitol Group

The Vitol Group, a private company, was founded in 1966 in Rotterdam, the Netherlands with 330 employees making up its shareholders with a remaining 2370 other employees. The company is now the world's largest independent energy and commodity trader.

Vitol S.A and Felda Global Ventures Holdings Berhad (FGVH) signed a Memorandum of Understanding (MOU) to collaborate on the supply, international trading, marketing, logistics operations and risk management on various commodities, excluding oil and fats. Under the terms of the MOU, the two parties plan to incorporate a joint-venture company in Kuala Lumpur with FGVH as the majority shareholder.

Vitol has a 50% share in VTTI, a storage and terminals business which operates 11 terminals on five continents with an existing capacity of approximately 6.5 million cubic metres which includes its recently completed 841,000 cubic metre world-class oil products terminal in Tanjung Bin, Johor, Malaysia. The 50% joint venture with Malaysian maritime conglomerate MISC for the ATB oil terminal in the Port of Pelepas received its first tanker on April 10th 2012.

Three key points

1. The Vitol group already has a successful track record in Malaysia with the 841,000 cubic metre world-class oil products terminal in Tanjung Bin, Johor, Malaysia.  

2. Its trading portfolio includes crude oil, petroleum products, bunker fuel, LPG, LNG, natural gas, coal, power, metals, carbon emissions and sugar. Its 2011 revenue was US$297 billion.

3. Vitol has offices in Malaysia and other OIC countries:

Malaysia - ATT Tanjung Bin Sdn Bhd

Bahrain - Vitol Bahrain E.C.

Nigeria - Vitol Exploration Nigeria Limited

Pakistan - VTT Port Qasim

United Arab Emirates - Vitol Dubai Ltd.

Just the brief facts for now. Ade lagi on d way... stay tuned.

Sugar, oh honey honey...

And the sweet fact is:

Domestic consumption of sugar has been growing steadily at 4.1% per annum and reached 1.4 million metric tonnes in 2010. The increase in sugar consumption can variously be attributed to higher sales of soft drinks and sweet beverages, biscuits and cookies, bread, chocolate and other confectionary products. A lack of substitutes and the Malaysian sweet tooth, no matter how much they want their drinks or their food to be ’kurang manis’, will probably ensure the long term growth  of the business.

It was therefore not surprising for Felda Global Ventures Holdings Sdn Bhd (FGVH) to venture into the sugar refinery business. In early 2010, it took over Malayan Sugar Manufacturing Co Sdn Bhd (MSM) and other sugar related assets and following that, took a 20% stake in Tradewinds (M) Berhad, making it effectively  a major player in the sugar refining business in Malaysia.  Jointly, MSM and Tradewinds hold  a monopoly on the sugar refining business in Malaysia. The import of refined sugar in Malaysia is only allowed for industrial consumers with approved permits.

Around the same time, world sugar prices started climbing upwards, resulting in four price increases pushing the retail price of sugar from RM1.45 per kilo in December 2009 to RM2.30 per kilo in May 2011. 

As sugar is a controlled item in Malaysia, several mechanisms are in place to check any price hike in what is seen as an essential item and which could potentially put the lower income group in the population in a difficult position. One of the mechanisms in place is the subsidy that the government pays to the sugar refiners. Today, for each kilo of sugar that is bought, the government pays 54 sen in subsidies or a total of RM567 million a year an increase from 20 sen or RM262.4 million the previous year. Because of this subsidy prices of sugar have remained at RM2.30 per kilo since May 11, 2011 almost a year ago.

The control in the price of sugar means two things for FGVH’s foray into the sugar business. Firstly, because the price ceiling is in place,  there will not be price fluctuations that could affect the demand for sugar. The consumption of sugar is therefore expected to grow at a healthy CAGR of 4.3% from 1.5 million tons in 2011 to 1.8 million tons in 2015.

Secondly, it need not worry about fluctuating raw sugar prices. The Ministry of International Trade and Industry together with local refined sugar producers in Malaysia have secured long-term contracts  with international exporters to cap the buying price of raw sugar at US$0.26 per pound for the next three years. MSM obtains 99% of  its raw sugar  from suppliers in Australia, Brazil and Thailand. Less and less sugar cane  is being planted on its land in Chuping, Kedah as a result of a shift to higher value crops namely oil palm and rubber. 

As a result, FGVH’s sugar business accounted for 31% or RM2.3 billion out of its total business for 2011. It has a 57% market share of the sugar market based on its production volume of 958,277 metric tones in 2011.

By all accounts, FGVH’s sugar refinery business is in a good position  for the next three years as it appears to have all its bases covered. Moving forward FGVH, plans to expand its raw sugar refining capacity and diversify to external markets through strategic acquisitions or investments overseas. It also plans to focus  on its core sugar refinery business by unwinding its operations in sugar plantations and will convert the use of this land to plant rubber..

As a growth strategy, FGVH can consider increasing its current refinery capacity which it inherited and perhaps look into buying  raw sugar production at its source.  It could take a leaf from the previous owners of MSM, who now own Sydney-based CSR Ltd’s sugar and renewable energy business, Sucrogen. The companies supply raw sugar and operate approximately 200,000 ha of sugar cane plantations in Indonesia respectively.

Been away for awhile, but following developments closely. What got me tickled was that FGVH is being touted as the 2nd largest IPO this year, behind FACEBOOK...

Hope it doesnt lose FACE like the book with dismal 1st week prices. But, here in Bolehland, I want to share the FACTS:

Felda Global Ventures Holding Berhad’s (FGVH) impending listing on Bursa Malaysia is attracting wide interest throughout the world, especially after Indonesian palm oil plantations company, Bumitama Agri’s initial public offering (IPO) on Singapore’s stock exchange received overwhelming investor response, attracting an oversubscription of 30 times for its share offer.  

Both offerings are  not a coincidence. Global demand for CPO is at a CAGR of 4.8% and will reach 74.5 million tonnes in 2015, a jump from 62.7 million tonnes in 2012. The interest in bio-fuels and bio-mass has also attracted more interest in the sector. Many companies are clamoring to join the ranks of more than 20 key industry players already operating in the oil palm sector. More than half of this, or approximately  11 companies are  Malaysian.  Those further afield like Nigeria and other African nations are also increasingly attracted by the relatively high margins of return on the business which is currently around 30%.

However, FGVH’s key advantage is that it manages large land banks located in areas that can produce the highest yields; within 0 – 20 degrees of the equator with high temperature and humidity and evenly distributed annual rainfall. In addition to the approximately 325,000 hectares of land planted with palm oil, which is leased from FELDA, it has also acquired a 95% interest in PT Citra Niaga which owns 14,385 hectares in West Kalimantan, Indonesia earmarked for oil palm plantations. FGVH has also established a 50 : 50 joint venture with Lembaga Tabung Haji  to further develop 42,000 hectares of oil palm plantations in East and Central Kalimantan.

This significant land bank points to FGVH managing the largest mature planted area in Malaysia while globally, it is the third largest oil palm plantation operator.

In terms of CPO production, Felda Holdings Berhad (FHB), of which FGVH holds a 49% equity stake, is the leading CPO producer globally with a production volume of 3.3 million metric tonnes or 6.6% of global production. The annual average local delivered prices for CPO in Malaysia have increased from RM836.5 per metric tonne in 1991 to RM3,219 per metric tonne in 2011 and is likely to be sustained in the short to medium term.

Palm products now constitute 42% of FGVH’s 2011 revenue of RM7.4 billion as stated in its draft prospectus on the Securities Commission’s website.

FGVH has earmarked Southeast Asia and Africa as priority regions to increase its oil palm plantation land bank. It also plans to replant 15,000 hectares of its existing land bank to improve the age profile of its plantation and increase its current yield of close to 20 metric tonnes of fresh fruit bunches (FFB) per hectare per annum. By leasing the land from FELDA, FGVH will have better control of the replanting programme and will drive efficiency improvements. All trees above 25 years old yielding less than 18 metric tonnes of FFB per hectare per annum will be replanted in stages.

In addition to oil palm, FGVH also cultivates and harvests cup lumps on 10,308 hectares of rubber plantations on FELDA-leased land. Malaysia is still a relatively large player in this industry with one million hectares planted with rubber, behind Indonesia (3.4 million hectares) and Thailand (1.9 million hectares). The demand for rubber comes primarily from latex products, tyres and tyre-related products, and industrial as well as general rubber products. Far from being a sunset industry, rubber is still relevant with global prices on the increase from RM2.43 per kg of SMR in 2000 to RM13.50 per kg in 2011.

It is pertinent to note that Malaysia is the world's leading producer and exporter of catheters, latex threads, and natural rubber medical gloves, supplying more than 80% of the world market for catheters, 70% for latex threads, and 60 % for rubber gloves.

FGVH therefore sees rubber as a profitable member of its plantation business. It plans to increase its plantation land bank to 30,000 hectares by 2015 by converting up to 10,000 hectares of sugar plantations and low-yielding oil palm plantations to rubber plantations. In this way, it will optimize its crop portfolio.

On its debut, Bumitama shares traded as high as S$1.02, about 37 percent higher than its IPO price of S$0.745, on volume of more than 195 million shares. It was the top traded stock by value and the second highest by volume in the Singapore market that day.

Given that FGVH is about three times bigger in terms of the size of the plantation that it manages and produces about 10 times more CPO, its listing scheduled for early June 2012 promises to be equally if not more exciting. Lets hope we dont lose FACE over this listing.