FGV's lack of transparency

Good article in The Star: Why FGV should handle whistle blowers with care

Some snippets and some comments by me:


In fact, one of the reasons why the Employees Provident Fund (EPF), a stickler for corporate governance, disposed of its interest in FGV is because there was no separation of powers between the board and the major shareholders.

The provident fund, for instance, felt that the total remuneration package for the chairman, which was stated at RM2.67mil in the 2016 annual report, was seen as too high.

The powerful provident fund expressed its dissatisfaction on the way FGV was managed by disposing its shares. In fact EPF’s chief executive officer Datuk Shahril Ridza Ridzuan hardly completed a year as a board member of FGV.


I am sorry to say but I find this very disappointing from the EPF. By selling they even drove down the share price giving them an even lower price for the last shares they sold.

Could they not have done more? If they were unhappy about the Corporate Governance inside FGV then they could have voiced out their concerns, first internally, and when no adequate response has been issued, they can simply call for a press conference. Surely journalists from all major media outlets would show up and report on the issues. That would have forced the company to issue replies to some thorny issues and would have given some much needed transparency. Who knows, some M&As might have been prevented that way, for the benefit of almost all parties involved.


Only now, after Isa has been moved out of FGV does the board admit that the company lacked governance.


The problem with all the initiatives from Bursa and SC is that it looked like CG was good inside FGV. But FGV was simply ticking all the boxes.

"Real" CG is not about ticking boxes, but how the company handles itself for instance in cases of conflict of interest (rather common in Malaysia), transparency towards shareholders, major strategic decisions like M&A activities, etc.

The question is if FGV actually has improved its CG? From the announcements that have been made on the Bursa website I doubt it, I find hardly any relevant information on what has been going on the last few months, for instance nothing about:

• The work done by Idris Jala, let alone the contents of his report (probably only the major shareholder is privy to this information).
• The serious allegations by Zakaria (and others) regarding expensive, non-core acquisitions in the past
• The real reasons for the resignation of the previous Chairman and who the new chairman is (the last might have been an honest oversight though)
• The Edge Malaysia wrote a very good series of articles with lots of useful information (including interviews of the main persons involved), most of which was never revealed

He [Zakaria] should not be penalised for speaking out. Because this would render redundant all the governance structures and whistle blowing channels that are in place in FGV.


Exactly. Whistle blowing in Western countries is already difficult enough (many regret later on that they blew the whistle), doing the same in Malaysia (a country with the highest Power Distance Index in the world) is so much more difficult. We need to respect people who speak out based on conviction and proper information.

I hope to see a healthy dose of transparency in the near future, what was really going on the last few months, and a proper, honest evaluation of the controversial M&As FGV has done in the past. Several companies in Singapore (most notably SingPost and Singtel) have done so in similar situations (by an independent advisor under the guidance of the independent directors) and an extract of the final report has been forwarded to the SGX website. Will the same happen with FGV? We will wait and see.

EPF lost only RM 97 Million on FGV?

Article in The Star:

EPF records RM203.18mil realised loss from Felda Global Ventures stake

One snippet:


The Employees Provident Fund (EPF) recorded a realised loss of RM203.18mil from its investment in Felda Global Ventures Holdings Bhd (FGV) as at August last year.

In a written reply to Dr Ko Chung Sen (DAP-Kampar), the Finance Ministry said, however, that EPF had gained a dividend income of RM105.77mil.

The assumption that most readers will make reading the above is that the loss EPF made on the FGV investment was RM 203 Million, that EPF did however receive RM 106 Million dividends, for a total loss of RM 97 Million.

That is bad, but given that EPF had bought a total of 309M shares in August 2013 for about RM 1.45 Billion, the loss equates to about 7%.

There is one "tiny" problem with the above: the assumption has to be wrong.

EPF must have lost much more on their investment in FGV, my guess is around RM 600 Million, so after adding the dividend of RM 106 Million about RM 500 Million.

The confusion comes (most likely) from losses that EPF had already booked in previous years on the FGV investment. How much these losses were is not revealed.

By mentioning the dividend income of RM 106 Million (which is the total dividend received by EPF over all years), the confusion is further increased. Mixing losses over a limited time with dividends over the lifetime in one paragraph without any further explanation does not seem like a good idea.

My reasoning behind the estimate of much larger losses can be derived from the share graph of FGV:

The first phase (June 2012 until August 2013, from IPO up to the 1st red line) is the accumulation phase in which EPF bought 309 Million shares, for an average price of about RM 4.70, total cost about RM 1.45 Billion.

The second phase (September 2013 until March 2015, between the 1st and 2nd red line) EPF had disposed 110 Million shares, it will definetely have lost money on these trades, but still limited.

The third phase (April 2015 until August 2016, between the 2nd and 3rd red line) is the really painful one, EPF disposed of 199 Million shares and received on average clearly less than RM 2 for these shares, the losses in this phase alone must have been more than RM 500 Million. It is this 3rd phase which makes it obvious that the reported loss of RM 203 Million does not cover all losses.

After adding the RM 106 Million in dividends received and subtracting expenses occurred (brokerage, operational) the losses will be substantial to the tune of about half a Billion RM, much more than the implied losses of RM 97 Million. And that is even without taking into consideration the rather large opportunity costs.

I hope that in the future we can have more clear statements regarding financial matters.

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 .....

EPF exits Felda

Article in The Edge: Felda Global falls 3.70% on EPF exit as shareholder, one snippet:


"Shares in Felda Global Ventures Holdings Bhd (FGV) fell 3.70% this morning after the Employees Provident Fund (EPF) said it no longer has any stake in FGV, as it assures members that the EPF practises high standards of corporate governance in its investments, with robust policies on risk control and asset allocation.

At 9.17am, FGV fell 6 sen to RM1.56 with 2.31 million shares traded.


"In line with these best practices, we have been closely monitoring the equity performance of FGV over the years and have gradually sold down our shareholding," the retirement fund said in a statement yesterday."

Investing one's own money in shares is risky, and needs proper analysis.

Investing OPM (Other People's Money) requires more diligence and responsibility.

Investing in IPO's even more so, due to all the hype.

EPF invested OPM in FGV's shares during its IPO, even became "cornerstone investor". In February 2012 it owned 185 Million shares in FGV valued at about RM 1 Billion.

Now EPF said it sold all shares in FGV, which must have resulted in a loss of a several hundred million RM, apart from the opportunity cost.

Would this not be a good time for EPF to clarify why it invested in FGV in the first place, what changed along the years, if there were any corporate governance concerns regarding FGV, and if EPF actively tried to do something about those?

Sentences like "best practices" and "closely monitoring" don't add any information, that is simply boilerplate text.

This is a concrete case in which EPF most likely has lost a substantial amount of money. When an investment takes off, and generates a nice amount of profit EPF is entitled to boast about it, but if the opposite happens, surely its members deserve a proper explanation.

I wrote before about FGV.

FGV: mixing politics with business

Article in The Star: "A roller coaster ride in store for FGV"

Some snippets:


The simple kampong folks who had relied on the value of these shares as their retirement income are now wondering what is in store for them now.


This applies to all shareholders of all companies, there is an issue of being properly informed about the possible risks of investing in listed companies, being warned that shares can go up but also down, about not putting all your eggs in one basket. And I don't mean hiding the risks somewhere on page 232 of a listing prospectus 500 pages thick. The media also has a role to play in this.


The reality is that FGV has been the undisputed worst plantation stock performer ever since its initial public offering (IPO) in July 2012. The share price decline was so bad that the company was removed from the Bursa Malaysia KLSE Index stocks last year.

Since its hyped-up listing at RM4.45 per share, the battered government-linked stock closed at RM1.67 yesterday representing a whopping 62.5% decline in share prices.


Many IPOs are very much hyphed these days and disappoint after being listed. The authorities might want to look into this issue. It (partially) explains the disappointing performance of the Bursa market.


It has serious political implications as the country heads towards a general election, speculated to be held next year.

The small holders are loyal supporters of the Barisan Nasional and their interests deserves [sic] to be protected.

FGV is regarded as a government “protected” stock and rightly so too.


Is the writer of this article (Wong Chun Wai) proposing a new sort of Corporate Governance, one whereby shareholders of listed companies who are loyal supporters of the ruling political party get some sort of special protection and others not?

An "interesting" proposal, but one which can not get any support whatsoever from this blog.

The Star itself is a listed company and majority owned by a political party, may be that explains the writer's thoughts though.

In my opinion, most of the problems of FGV are caused (not solved) by political connections, so the solution is rather simple: cut all ties between politics and business. Let professional managers  run companies (like FGV) without any political interference whatsoever. Cut the dead wood, base decisions on mergers and acqusitions on proper commercial terms, etc.

In the short run there might be some pain in certain quarters, in the long run there will be many gains for all.

Felda's recommendations: Bloomberg needs to check its data (2)

One of this blogs regular contributors send me some very helpful comments including a screenshot of the recommendations by the analyst (Ivy Ng from CIMB) as displayed on the Bloomberg terminal.

This does bring a lot of perspective to the story of yesterday.

The share price of Felda plus all the buy/hold/sell recommendations:

First of all a lot of "hold" recommendations starting in August 2012 (the report I linked to yesterday was probably the first research report) until August 2014. At that moment the stock has fallen to about RM 4, so the recommendations so far were not exactly great.

But then, the analyst changed her mind to a "sell", and that looks a good call since the share did drop to about RM 3.

Then things turn rather strange, while the share continues to slide all the way down to the RM 1.50 level, recommendations change from "sell" to "hold" to "sell" to "hold" back to "sell" again. There might be some reason for this (possibly an internal rule in CIMB), but I am not aware of that.

Then somewhere in April 2016 at a price of about RM 1.50 the analyst changes from "sell" to "buy" and at this moment (with hindsight and with the price currently at RM 1.93) that looks like a rather good call.

Rather remarkable, if I might add, seven different recommendations for a four year period.

Regarding the initial "hold" call and the rather high target price of RM 5.05 about which I wrote yesterday: CIMB was one of the brokers supporting the IPO, according to this article:


CIMB Investment Bank (CIMB.KL), Maybank Investment Bank (MBBM.KL) and Morgan Stanley (MS.N) acted as joint global coordinators for Felda Global's flotation, with JPMorgan (JPM.N) and Deutsche Bank (DBKGn.DE) working as joint bookrunners.


Given this, it would have been "near impossible" for an analyst of CIMB to issue a "sell" recommendation.

It is of course a clear conflict of interest situation, and some of that might be found in the disclaimer attached to the report, but it is all rather vaguely described.

I would have preferred that it would have been clearly explained on the first page of the research report.

Regarding "Ng, who is top ranked and has returned 63% for her call on Felda, has the only buy call out of 14 analyst recommendations, according to Bloomberg data": Bloomberg tracks the one year return of a stock assuming an investor followed the recommendations over that period.

I think that is a rather limited tracking of performance, especially if an analyst has followed a company for much longer and had issued many recommendations in the past.

Anyhow, things do look markedly better than I initially thought, I was not aware that the analyst had indeed turned negative somewhere in 2014.

Felda's recommendations: Bloomberg needs to check its data

Article in The Edge, attributed to Bloomberg, one snippet:


The company has a lot of potential to unlock and its share price is attractive, Ivy Ng, an analyst at CIMB Bank Bhd said in a July 31 report. Ng, who is top ranked and has returned 63% for her call on Felda, has the only buy call out of 14 analyst recommendations, according to Bloomberg data.


I have never written much about Felda, to me it looks more like a (partially) political play with a (strong) social element involved, not exactly a market-driven, commercial company that one would expect to find on Bursa (Bursa apparently thinks differently about this).

However, an analyst who is top ranked and has returned 63% on this stock, that does draw my attention.

With the help of Google I found the following report (dated August 6, 2012) written by the same analyst, conveniently archived by i3Investor:

A 93-page (!) research report with terms like "Coming into bloom", "Dominant agri group", "Room for growth", "M&A is the key", that sounds all rather optimistic with hindsight.

And the target price ..... RM 5.05!

In other words, investors who bought based on that target price in 2012 are sitting on a loss of 62% (excluding dividends but also excluding costs) over a timespan of exactly four years instead of a profit of 63%.

Is it possible that Bloomberg only checked the latest recommendation (possibly a few months old) from this analyst?

Probably, but I don't think that would be the right thing to do.