To what extent does FELDA contribute to overall employment and GDP in Malaysia?
AHMAD: The FELDA group was established in 1956. It is a quasi-governmental agency. It was established as a social engineering program to eradicate poverty in the rural communities. FELDA was funded by the World Bank, and the Malaysian government is very proud of FELDA’s success story. FELDA is the most successful land development program in the world. FELDA received a citation from the World Bank and one of FELDA’s main personalities received the coveted Ramon Magsaysay Award for his work on FELDA. The FELDA scheme encompasses a large group of settler-smallholders throughout the country. The pioneer group totaled 112,650 families. Today, if you assume each family has five children, that is over 500,000 families. We now have a third generation. We believe there are now 2 million citizens directly or indirectly involved in the FELDA group. This is excluding contractors and members of the business community involved with FELDA. It is a fairly big group in terms of population within the rural community. In terms of contribution to Gross National Income (GNI), last year Malaysia produced about 18m tonnes of palm oil. FELDA produces about 3.3m tonnes. This represents about 18% of Malaysia’s total production. This is from palm oil alone. FGV is a fully integrated group with very strong upstream, midstream, and downstream activities. Within the FELDA group, there are 850,000 hectares of land that are cultivated and planted. 500,000 hectares belong to the farmers and settlers. FGV manages 350,000 hectares. At 850,000 hectares, FELDA is the biggest palm oil operator in the world.
How is FGV working within the framework of the Economic Transformation Programme (ETP)?
AHMAD: One of the key aspects of the Economic Transformation Programme (ETP) is addressing the age profile of the palm oil trees to ensure we have new generations of planting materials. We also need a balanced age profile. In the palm oil business, our goal is to have 5% young trees and 5% mature trees. This issue must be addressed very seriously. One of FGV’s initiatives is to accelerate the replanting of our oil palm trees. We are undertaking replanting at the rate of 15,000 hectares a year. This is having a significant annual impact on the overall economics of the palm oil sector. We also have other modernization activities. Palm oil requires oil mills to process. There are 420 oil mills in the country. Within the FGV Group, we have 71 oil mills. We are accelerating the modernization of our oil mills. In this business, the oil extraction rate is very critical. Everything is processed into crude palm oil, and eventually into refined palm oil. We are innovating new technology, and improving the processing of palm oil through innovation.
What impact will FGV’s new investments into modernization have on revenue and profit generation in the future?
AHMAD: FGV is in the plantation sector. It must be viewed from a long-term perspective. However, we are a public company, so we must report quarterly results. But the long-term plan is also important. For the first three years under our new model, our revenue should double. Profit has seen a steady growth because of our reliance on the palm oil sector and our profit from the mid-stream and downstream activities have also contributed positively. We are also aggressively replanting. We should see a sharp growth during the fourth year. There are two measures for this. One of them is the organic growth, which addresses the efficiency, productivity, and the unit costs of replanting and modernizing. Another measure is cushioning the age profile within FELDA. We are actively looking at mergers and acquisitions. This will address our issues in terms of gross revenue and gross profit.
What are your views on the overall performance of the company since the IPO?
AHMAD: FGV issued its Initial Public Offering (IPO) on June 28th, 2012. It was a very complex IPO with both social and economic dimensions. FGV was the second biggest IPO in the world at that time, behind Facebook. The share price increased 18% on the first day of listing. During the six months since the IPO, it has remained above the listed price. The price of crude palm oil is one of the key factors affecting our price. At the beginning of 2012, a tonne of crude palm oil cost about MYR 3,500 ($1,150). Today, a tonne of crude palm oil costs about MYR 2,200 ($720). We are very dependent on the palm oil business. This affects the perception of investors. When analyzing our stock price, a long-term approach must be used. We promise good dividends of about 50% of profit after tax. We are also using a strategic view of world business about how to diversify income so we are not too reliant on crude palm oil. We are looking at new areas in Indonesia, and we are looking at implementing FELDA models in ASEAN countries like Myanmar and Cambodia. We are also looking into areas in West Africa. West African countries are well suited for palm oil. We are planning to increase our land area. We are identifying areas in Cambodia and Myanmar to begin this process. We are also looking into sugarcane. We are very strong in the downstream areas of the sugarcane business, but we are not involved in the upstream process. We are looking into these countries for sugarcane as well. This will address our strong dependence on palm oil. Diversification and horizontal integration are important to FGV.
How significant is FGV’s role in Malaysia’s capital markets?
AHMAD: FGV’s IPO in June created both awareness and confidence in capital markets. It was then followed by a series of other listings. In a period of American and European economic downturn, we believe the ASEAN region’s capital markets have shown great resilience. ASEAN has acted as a buffer against the uncertainties in the rest of the world. With a population of over 500m people, ASEAN is a strong emerging market region. The location of this region is also very significant, as it is between the large, growing economies of India and China. These middle-income markets are growing, and so are Malaysia’s capital markets. This had been proven since the FGV IPO.
What makes FGV a strong stock for buyers?
AHMAD: The current Price to Earnings Ratio shows that today’s price is a very good price for buyers, especially as a long-term investment. As a group, we are addressing our internal structure. We are addressing the productivity factors. We are putting in place gain-sharing mechanisms to motivate the staff. We are addressing the age profile of the palm oil trees. We are looking at opportunities for mergers and acquisitions. We have a strong foundation of companies in our region. We need to fine-tune our organization to make it more efficient. Our focus will soon be on expansion within the ASEAN region. We know this region very well in terms of marketing and consumer requirements. For example, of the cooking oil available in Myanmar supermarkets, our oil accounts for about 50%. We are also expanding this business into Cambodia and Laos. These areas, along with Malaysia and the Philippines, make this a very large market. The potential of our stock, with a good dividend policy, makes it very stable. We have strong assets, unlike some tech companies. We have a long history of profitability and strong management. We also have the support of the government. In the past, there has been some ambiguity in terms of responsibility. Today, the government is telling the Federal Land Development Authority (FELDA) to take care of the social economy, while FGV will focus on business aspects. We have a good system for rewarding staff. I think it is a good stock overall, and we will see a good future.
We are looking at new areas in Indonesia, and we are looking at implementing FELDA models in ASEAN countries like Myanmar and Cambodia. We are also looking into areas in West Africa. West African countries are well suited for palm oil.
How does FGV balance the obligations of social responsibility with the responsibility to maximize returns for shareholders?
AHMAD: We believe Corporate Social Responsibility (CSR) is very important to growing the business. Employees must be happy. The community must be enjoying the benefits of our growth. CSR is very important. We set up the Yayasan Felda Foundation to assist in CSR activities. We provide scholarships and training to prepare Felda settlers and their children and ensure that they are gainfully employed. When we had our IPO, we raised about MYR 10.5bn ($3.4bn). MYR 6bn ($1.96bn) went to FELDA. The remaining MYR 4.5bn ($1.47bn) went to FGV to expand the business. Half of this is going to upstream activities. Of the MYR 6bn ($1.96bn) that we raised for FELDA, MYR 1.7bn ($556m) was distributed to the settlers. Each of the farmers received about MYR 15,000 ($5,000). Recycling this money through the farmers has not only helped them, but it has helped to generate economic activity. This is our way of saying thank you to the farmers who have been with us for the last 40 years. The Felda community has contributed greatly to the palm oil industry in this country. Today, the Felda farmers are doing very well. Their average income is about MYR 3,000 ($980) per person, which is above the national average. The top 10% of the farmer population are entrepreneurs with a good income. Their quality of life has improved significantly. We want to share the success story of this FELDA model with other emerging market countries in the ASEAN region, and in West Africa.
How much opportunity exists for the commercialization of palm oil biomass? What are the biggest challenges in regards to this?
AHMAD: FGV and Sime Darby have been chosen to spearhead a transformation initiative to convert biomass into bio-fuel One tonne of palm oil generates ten tonnes of biomass. If you produce 18m tonnes per year, there are 180m tonnes available. It is also important to put some of this back into the soil to make sure the sustainability of the soil chemistry is not compromised. If we take 20% of the available biomass, then there are about 36m tonnes available to convert to bio-fuel The technology is in place so the challenges are all related to logistics. We must figure out how to bring the biomass from the plantation to the factories at about $100 per tonne. If we can do that, then it is sustainable.