RSPO credentials at risk, immediate cash flow impacts
New data shows that Felda Global Ventures Holdings Berhad (FGV:MK) is in breach of Roundtable on Sustainable Palm Oil (RSPO) standards, as its subsidiaries cleared 880 ha of identified High Conservation Value peatlands. RSPO certified sustainable palm oil (CSPO) often sells at a premium to crude palm oil (CPO), which means FGV may lose this premium if temporarily suspended from RSPO. Malaysian palm oil giant IOI Corporation was temporarily suspended from RSPO in March 2016. If FGV follows suit it could loose a CSPO premium of 1% to 2% compared to their average 2015 selling price, resulting in $6 to $12 million in cash-flow-at-risk in 2016, excluding broader market share losses.
Before FGV’s June 2012 IPO, the company set a goal to become the world’s largest palm oil company with a targeted land bank of over 1 million ha. Despite a number of acquisitions, the company has not reached its goal. Instead, over the same period, FGV (-72.4%) has had disappointing financial performance in comparison to relevant Indonesian (-17.4%) and Malaysian (-13.4%) regional indices.
Yet, growing global CSPO demand (162% increase year-over-year) – driven in large part by over 300 corporate “no deforestation” purchasing policies, a strong dollar, and climate change impacted-weather conditions – is creating clear market signals that new CEO Zakaria Arshad can address to maintain FGV’s competitive advantage.
Mr. Arshad’s five key opportunities to improve FGV’s financial performance and risk profile are:
- Integrate contested land bank risk analysis within a firm-wide financial risk management culture to prevent a repeat of FGV’s subsidiaries knowingly clearing High Conservation Value areas and peatlands
- Manage FGV’s plantation assets in accordance to RSPO policies to avoid future suspension and cash-flow-at-risk
- Grow firm value through value-added CSPO product development rather than “buying earnings” through financially risky acquisitions that reduce interest coverage ratios and increase leverage
- Resolve issues pertinent to FGV’s 22% contested land bank so that FGV can sell firm-wide “higher-margin” CSPO into a growing global market
- Adopt integrated sustainability and financial risk analysis from the Board of Directors to the plantation manager to improve overall risk management