Tuesday, 3 January 2017

EPF exits Felda (2)

Article in The Star: "EPF not to be blamed for leaving FGV", some snippets and some remarks by me.

Regarding the title of the article, I don't blame EPF for exiting, in the contrary, I just question why EPF invested in FGV in the first place.

The FGV was sitting on a cash pile of more than RM5bil and its business model was pretty straight forward – which is to collect the fresh fruit bunches and process them into crude palm oil.

The plan was always to expand aggressively through acquistions (even the name hinted clearly at that, "Global Ventures"), for instance this article in the Borneo Post:

The strategic initiatives to improve efficiency include extensive oil palm replanting programme to improve age profile at approximately 15,000 hectares per year utilising Felda’s award-winning planting materials to increase fresh fruit bunch production and improve oil extraction rate.

The proceeds would also be used for potential acquisitions of additional land bank in South-East Asia and Africa for planting oil palm and rubber by 2015.

Meanwhile, Felda would expand downstream capabilities to enhance value of its upstream products.
This included further acquisitions and investments in refinery assets, consumer packed plants and bulking facilities.

In general, roughly 2/3rd of acquisitions globally fail, either they are done for the wrong reasons, or because of the information bias, etc. Investors in FGV should thus have known at that point in time that things might not work out well, those acquisitions might destroy value instead of enhancing it.

The risk was minimal for the EPF. As long as FGV keeps cutting its production cost and utilises its huge cash pile for re-planting activities there is very little to fear.

First of all FGV had announced already they would not just use the money solely for internal purposes. Secondly, since when has an equity investment "minimal risk"?

However even then, there were some nagging issues especially when it came to some corporate governance practices.

Why invest when there are "nagging issues"?

For starters, FGV chairman Tan Sri Mohd Isa Samad is also the chairman of Federal Land Development Authority (Felda) which is the major shareholder of the listed company. Isa, who is also a politician closely aligned to Putrajaya, also sits on board of many subsidiaries.

Please note this article:

Umno vice-president Tan Sri Mohd Isa Abdul Samad (pix) has been suspended from the party by its disciplinary board for six years for breach of the party's code of ethics during the party elections last year, according to his political secretary, Salim Shariff, on Friday.  

The suspension means that Isa will be stripped of the post of vice-president that he had won with the highest number of votes among the three posts of vice-president at the same party polls.

Salim said Mohd Isa, who is Federal Territories minister, was found guilty on five of nine charges he had faced with regard to party discipline.

The Star continues:

"There is nothing wrong with active politicians sitting on the board of companies."

Oh my ....... where to begin?

One should try to minimize conflict of interest situations, because it is exactly those situations that often cause serious problems.

In Malaysia it looks like the policy is to maximize conflict of interest situations.

"Like all its investment companies, the EPF would have certainly voiced its concerns over FGV’s board composition."

Can the writer give concrete examples of this voicing of concerns? I have hardly ever seen the EPF actively fighting for minority investor's rights. EPF is in a very strong position, I am pretty sure that if they voice their concern many newspapers would write about those concerns. Apart from voicing their concerns, the EPF can also actively vote against resolutions. This would also serve as an example for the small minority investors, who would feel more powerfull.

I normally like Shanmugam's articles, but definetely not this time .....

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