Felda launches Malaysian IPO of up to $3.2 billion

Felda Global Ventures yesterday kicked off the bookbuilding for one of the most awaited initial public offerings in Asia this year — especially since other deals are falling by the wayside amid a continuing decline in global financial markets. The Malaysian government-owned agricultural commodities company is seeking to raise between M$8.76 billion and M$10.18 billion ($2.78 billion to $3.2 billion), which could make it the second-biggest IPO in the world this year after Facebook’s $16 billion offering, according to Bloomberg data.

The company, which has a key focus on crude palm oil, rubber and sugar, lodged its prospectus with the Malaysian stock exchange yesterday morning, just hours after Graff Diamonds had decided to pull its $1 billion IPO due to “adverse market conditions”. However, sources say Felda should be much less affected by near-term market sentiment because of strong support from domestic investors. Some 19.2% of the deal has been set aside for so called Bumiputera (or ethnic Malay) institutions.

On top of that, the company has secured 10 cornerstone investors that will take up about 33% of the transaction and one strategic investor that will invest approximately $140 million, depending on the final price. Five state governments will also invest in the IPO, while 12.5% has been set aside for retail investors, including employees and Felda settlers.

The result is that, even though the deal is large — it is set to become the third-biggest listing in Malaysia ever after Petronas Chemicals and Maxis, which raised $4.15 billion and $3.3 billion respectively — there is actually not very much stock left for institutional investors. A quick calculation suggests that only about $500 million to $600 million is left to place with institutions and will be split between domestic and international accounts.

Indeed, sources suggest that in the end only about 10% of the entire deal will be sold to international investors. So it is perhaps not too surprising that there was a lot of interest to come in as a cornerstone investor, which means a guaranteed allocation in return for a six-month lock-up. According to one source, the bookrunners had more demand than they could possibly fill and had to scale back allocations — a sharp contrast to many other IPOs this year, which have struggled to get investors to commit to a lock-up and the possibility of having to pick up the shares at the top end of the price range.

“The Felda IPO seems almost immune to the negative sentiment in the global financial markets,” one source said earlier this week.

Felda’s cornerstones include Qatar Investment Authority, AIA Group, Value Partners and Fidelity, as well as six Malaysian entities. The Guoco Group is investing through three different entities, which explains why some reports are talking about 12 cornerstones. Between them the cornerstones will own about 20% of Felda after the listing.

Meanwhile, commodity trading firm Louis Dreyfus has agreed to buy enough shares to give it a 2.5% strategic stake after the IPO. The French company has also entered into an offtake agreement with Felda that will see it buy about one-third of its production of crude palm oil, a move that should help support Felda’s realised selling prices.

Felda is aiming to float 60% of the company in the form of roughly 2.2 billion shares, of which 44.8% are new shares. The rest are existing shares sold by the current owner, the Federal Land Development Authority.

The shares are offered in a range between M$4 and M$4.65, although retail investors will be able to buy them at a 2% discount up to a maximum price of M$4.55.

The deal also comes with a 5% greenshoe option that could increase the free-float to 63% and the maximum proceeds to as much as $3.38 billion.

The price range values the company at 11.3 to 13.1 times its projected earnings for 2013, based on the joint bookrunner consensus. IOI Corp and Kuala Lumpur Kepong (KLK), which are viewed as two of the key comps, have different accounting years, making it difficult to make a direct comparison. However, IOI is currently trading at a June 2013 price-to-earnings (P/E) multiple of 14.6, while KLK is quoted at a September 2013 P/E multiple of 15.7.

This suggests that Felda, which has almost twice the amount of hectares planted with mature oil palm as the other two, is coming at a decent discount at the bottom of the range. However, in the current market environment investors have been demanding wider and wider IPO discounts, even for companies that they agree should potentially trade at a premium under more normal market conditions. But given the small number of shares left to place, most observers say Felda should do fine.

In 2011, the company ranked as the third-largest oil palm plantation operator in the world based on planted hectares, according to business research and consulting firm Frost & Sullivan citied in the prospectus. The company currently operates 343,521 hectares of oil palm plantation estates in Malaysia that produced 5.2 million tonnes of fresh fruit bunch last year. Its 49%-owned associate, Felda Holdings, is the largest producer of crude palm oil (CPO) in the world based on production volume, having produced 3.3 million tonnes of CPO in 2011. This gives it a global market share of 6.6%.

According to Felda’s prospectus, palm oil is the world’s most consumed vegetable oil due to its competitive price and versatility. Between 2001 and 2011, global consumption more than doubled to 49.2 million tonnes and according to Frost & Sullivan it is expected to reach 60.7 million tonnes in 2015, driven primarily by imports by China, India and Indonesia. Last year, each of these countries accounted for about 13% to 14% of global consumption of palm oil. The compound annual growth rate of 4.8% from 2012 to 2015 is higher than that anticipated for global consumption of edible oils and fats in the same period.

The sale of FFB makes up the largest part of Felda's business and accounted for 43.6% of total revenues last year. The second biggest business is the sale of sugar products, which accounted for 29.4% of revenues last year. Its subsidiary MSM Holdings, which listed in Malaysia last year, is the leading refined sugar producer in Malaysia.

The company’s earnings have been improving in recent years. In 2011, Felda booked a net profit of M$1 billion from continuing operations, compared with M$929 million in 2010 and M$433 million in 2009.

However, during the first quarter this year, net profit fell to M$223.2 million from M$350.2 million in the same period last year, partly because the sale of soy and canola products are no longer reflected as revenues following a tolling agreement, partly because new incentive payments to plantation workers resulted in higher costs.

Felda is expected to use about half of the IPO proceeds for the acquisition of new plantation assets and another 19% for selective acquisitions of oil and fats, manufacturing and logistics businesses. The rest will go towards the construction or acquisition of mills and refineries, loan repayments, capital expenditure aimed at increasing its production capacity and efficiency, and working capital.

Felda Global Ventures was incorporated in Malaysia in December 2007 as the commercial arm of the Federal Land and Development Authority for overseas investments in the upstream and downstream palm oil business and other agribusinesses.

The institutional order books will remain open until June 13 and the price is expected to be fixed at the end of that day. The trading debut in Kuala Lumpur is scheduled for June 28.

CIMB, Maybank and Morgan Stanley are joint global coordinators and Deutsche Bank and J.P. Morgan are joining them as bookrunners.