Felda Global Ventures Holdings Sdn Bhd (FGVH) and its parent, the Federal Land Development Authority (Felda), are in the limelight once again.

This time around, it is because of FGVH’s takeover of tycoon Robert Kuok Hock Nien’s sugar assets in the country, with many wondering what the government authority has up its sleeve, and whether it will continue to churn out profits from the assets it is taking over from Kuok Group.

Felda and its units last made the headlines in June when Felda Holdings Bhd’s managing director Datuk Bakke Salleh was tipped to take over the reins of state-controlled oil major Petroliam Nasional Bhd from Tan Sri Mohd Hassan Marican. Talk of Bakke leaving has since died down, although insiders say he is definitely slated for bigger things under Prime Minister Datuk Seri Najib Razak’s administration.

The focus in the immediate term is on FGVH, which is buying Kuok’s Malayan Sugar Manufacturing Co Sdn Bhd (MSM), Kilang Gula Felda Perlis Sdn Bhd, about 5,800ha of land in Cuping, Perlis, and about 20% in Tradewinds (M) Bhd for a total consideration of RM1.5 billion.

Felda Holdings is 49% controlled by Lembaga Felda and 51% by Felda Investment Co-operative or Koperasi Permodalan Felda, which is the vehicle of Felda settlers and employees. The government has a golden share in Felda Holdings, while FGVH is the commercial entity of Felda.

Felda Holdings has under its control 850,000ha of plantation land and some RM1.5 billion in its kitty. It is arguably the largest oil palm plantation company in the world and owns 70 mills and seven refineries.

With the sugar business in its stable, is Felda biting off more than it can chew?

Task ahead
How will Felda and FGVH manage the new gargantuan sugar business it has acquired?
According to news reports, Malaysia’s sugar imports — largely from Australia — amount to about one million tonnes, which is about 90% of the raw sugar needs of the country’s four sugar  refineries.

A noteworthy point is that while Felda now has the plantations and refineries, Kuok Group had the whole spectrum of the business, including shipping facilities under Malaysian Bulk Carriers Bhd. More importantly, it had an extensive trading desk and the volume to secure cheap supplies of raw sugar.

Kuok is known globally as the sugar king and at one time, controlled as much as 10% of the global sugar trade. Thus, his familiarity with the sugar business and his experience and pertinence to MSM’s profitability cannot be understated.

Meanwhile, Felda, it would seem, has little experience in sugar. Most of its business has been in oil palm and rubber, and while it had a strategic 50% stake in Kilang Gula Felda Perlis, the running of the refinery was done by Kuok and his men.

In fact, most of the country’s sugar refineries, apart from Kilang Gula Felda Perlis — such as Central Sugar Refineries Sdn Bhd and MSM — are run by Kuok’s personnel as well.

While Felda and Kuok’s PPB Group Bhd each controls 50% of Kilang Gula Felda Perlis, MSM is wholly owned by PPB, while Central Sugar Refineries and Kilang Gula Padang Terap are controlled by Tradewinds.

According to Felda’s website, only 0.5% of its 853,313ha or some 4,461ha are planted with sugar cane. Economies of scale do not seem to favour Felda.

According to insiders, Kuok — who has sugar businesses in many parts of the world such as Lampung, Sumatra — buys raw sugar in bulk from Australia and Cuba , keeps his cost low via bulk purchases and trades sugar in China, Hong Kong and other regional markets.

But while the international sugar trade will remain competitive, the operating landscape in the domestic market may change after Felda takes over.

This is especially so as the government is increasingly looking at reducing subsidies. Price controls for one, may change to reflect the international scenario.

Felda’s forays
Most perceive Felda as a lethargic giant, a perception that may change in time. FGVH, for instance, is in the midst of hiring heads for its various divisions and there is no criteria of race or nationality, sources say.

“FGVH is an international animal with businesses in the US, China, Sri Lanka and Australia, among others. It is a giant in the making,” says a source.

In Australia, Felda has tied up with United Arab Emirates-based International Foodstuffs Co, or Iffco, which is the vehicle of the Kokhar brothers. The two have formed Felda Iffco Sdn Bhd, which has a 20% stake in Australian Agricultural Co Ltd, which is Australia’s largest producer of beef.

In the US, Felda bought Cincinnati-based Twin Rivers Technologies, which is a major producer of vegetable oil-based biodiesel, for almost US$70 million.

Felda’s associate company Voray Holdings Ltd has two refineries and one edible oil installation in China. Other shareholders of Voray include plantation stalwarts Kuala Lumpur Kepong Bhd.

Felda also has businesses in Pakistan, Sri Lanka and Thailand, among others.

A check with the Companies Commission of Malaysia reveals that Felda Holdings posted a net profit of RM635.7 million on the back of RM15.3 billion in revenue for the financial year ended December 2008.

Despite its gargantuan size, doubts persist as to whether Felda can emulate what Kuok has done over the years. Not only must it keep prices steady amidst volatile international prices of raw sugar, it must also stay profitable to justify its investments.

There are also other issues such as sugar prices, which are relatively low in Malaysia. Will prices rise now with Felda at the helm?

The low price of sugar is attributed to government subsidies, which is increasingly coming under threat.  

Subsidies, a thing of the past?
In June this year, Deputy Domestic Trade and Consumer Affairs Minister Datuk Tan Lian Hoe said that the government was toying with the idea of withdrawing subsidies for sugar.

According to news reports, the government’s subsidy for sugar this year will amount to some RM720 million, which is about about 70% of the RM1 billion in subsidies for bread, flour and cooking oil, among others.

Through the Price Control and Controlled Goods Ordinance, the maximum price of sugar was pegged at RM1.45 per kg for Peninsular Malaysia and RM1.55 in Sabah and Sarawak from Sept 13, 2006.

The Minister of International Trade and Industry Datuk Mustapa Mohamed said early last month that the government is understood to have been approached by certain parties looking for an increase in sugar prices.

“The sugar industry had asked the government to raise the retail price by 60 sen per kg from RM1.45 to RM2.05 from Jan 1. To avoid an increase, the government made the decision to implement a subsidy for sugar this year,” Mustapa said in Parliament.

An insider points out that it would be probably be easier for the government to implement a hike in sugar prices if the business is controlled by outfits linked to the government itself such as Felda.

Ownership issues can be sensitive when it comes to companies with control over essential products such as sugar and rice.

It was evident in the case of Padiberas Nasional Bhd (Bernas) when Hong Kong-based Wang Tak Holding Co Ltd ended up with a large stake of 31.5%. It drew criticism and eventually, was one of the reasons for Tradewinds to buy Wang Tak’s block in Bernas and undertake a mandatory general offer for the rest of the shares.

Although the Tan family of IGB Group Bhd fame controls Wang Tak, questions cropped up as to why a Hong Kong company had such a big stake in the national rice distributor.

Under such circumstances, Felda has the political clout to bring about changes in the sugar business.

Political clout
The Felda scheme was started in 1956 by the country’s second prime minister Tun Abdul Razak Hussein, the father of current Prime Minister Najib.

According to political observers, this is one of the reasons why the current premier has a keen interest in and is very involved in the goings-on at Felda.

Felda settlers number about one million and are located largely in the strongholds of Umno — the leading member of the ruling Barisan Nasional coalition — such as Pahang and Johor. These one million settlers have huge voting clout.

Various loans and other aid such as settler development programmes have been dished out to Felda.

This, however, does have a flip side. The settlers get dividends of about 12% to 13%, which are relatively high. And it is due to these high dividends that the planned flotation exercise of Felda has been difficult to achieve.

“The smallholders are happy with the returns they get; the company is cash rich. So, it was difficult for the Felda top guns to push for a flotation exercise,” an insider says.

Felda Holdings’ balance sheet as at end-December, 2008, showed it has slightly less than RM1.4 billion in fixed deposits, while its cash and bank balances amounted to some RM220.7 million.

It is largely because of Felda’s size and clout that many expect it to eventually gobble up Syed Mokhtar’s 43% in Tradewinds as well. But this however, remains to be seen.

Felda has been involved in bad business deals before, one of which was shipping outfit Sutrajaya Shipping Sdn Bhd, which acquired vessels that were inappropriate for the desired purpose.

With so many possibilities, it is unknown how Felda will fare at the helm of the sugar business. But there is no doubt it will remain in the spotlight, for now at least.

This article appeared in the Cover Story page of The Edge Malaysia, Issue 780, Nov 9-15, 2009.