fgv acquisition plan: financial analysis on ioi and klk

7/24/2019 FGV Acquisition Plan: Financial Analysis on IOI and KLK

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WESTMINSTER INTERNATIONAL COLLEGE, SUBANG

FGV Acquisition Plan: Financial Analysis on IOI and KLK

MBA for Executives

Alexis Choo Xin Nie

0131GKIGKI0415


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Declaration of Authenticity

This is to declare that the paper titled is an authentic work originated from me under the

guidance of Dr. Harwinder & Mr. Francis.

This paper was carried out in fulfilment of submission for Financial Analysis & Management

module of Master in Business Administration for Executives offered by Westminster

International College, Subang.

The contents found in this paper are solely based on research and case study and I have not

submitted to any other institution.


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Executive Summary

This written report examines two potential plantation-based organizations, IOI Corporation

Bhd and KLK Bhd in terms of its financial performance for year 2013 and 2014. Besides that,

the report dictates on the impact of recent economic conditions on both companies as well.

Their business model was reviewed along with their recent financial performance to conclude

and recommend for acquisition.

The introduction section of the report gives a brief summary of both companies and stating

clearly the objectives of the whole analysis. In the financial analysis segment, ratio analyses

were conducted on both companies according to their published financial reports such as

Comprehensive Income Statement, Balance Sheets and Cash Flow Statement.

From the research and analysis, critical evaluations are done especially on the risk exposure

and financial performances of both companies. By using these evaluations, a conclusion may

be derived to advice the higher management in making a wiser decision for acquisition.

The result of this analysis along with recommendation would be helpful in deciding the

i iti d ill id i the e e t ti t d RSPO R dt ble C fe e e


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Contents

Declaration of Authenticity ..................................................................................................................... 1

Executive Summary ................................................................................................................................ 2

List of Appendices .................................................................................................................................. 5

List of Charts........................................................................................................................................... 6

List of Tables .......................................................................................................................................... 7

List of Abbreviations .............................................................................................................................. 8

Objectives ............................................................................................................................................... 9

Investment Decision of FGV over Rajawali Group .............................................................................. 10

Company Background .......................................................................................................................... 11

IOI Corporation Bhd ......................................................................................................................... 11

Kuala Lumpur Kepong Bhd .............................................................................................................. 12

Ansoffs Growth Matrix................................................................................................................... 13Increase in Value and Distribution network ..................................................................................... 13

Economies of Scope .......................................................................................................................... 13

Competitive Advantage .................................................................................................................... 13

Impact of Current Economic Conditions towards both Companies ...................................................... 14

US Economy Growth strengthens USD ............................................................................................ 14


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LLA Cost Savings ............................................................................................................................. 25

Critical Evaluations on Investment Appraisal Techniques ................................................................... 27

NPV Schedule ............................................................................................................................... 27

Profitability Index ......................................................................................................................... 28

Internal Rate of Return .................................................................................................................. 28

Payback Period .............................................................................................................................. 28

Benefits of NPV ............................................................................................................................ 30

Weakness of NPV ......................................................................................................................... 30

Benefits of IRR ............................................................................................................................. 30

Limitations of IRR ........................................................................................................................ 30

Benefits of Profitability Index....................................................................................................... 30

Limitations of IRR ........................................................................................................................ 30

Benefits of Payback Period ........................................................................................................... 30

Limitations of Payback Period ...................................................................................................... 30

Conclusion ............................................................................................................................................ 31

References ............................................................................................................................................. 32

Appendix ............................................................................................................................................... 34


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List of Appendices

Appendix 1 FGV Business Model 2015 - 2020 ....................................................................... 34

Appendix 2 FGV Crop Age Profile ......................................................................................... 34

Appendix 3 IOI Crop Age Profile ............................................................................................ 35

Appendix 4 KLK Business Model ........................................................................................... 36

Appendix 5 IOI Business Model.............................................................................................. 37

Appendix 6 MYR vs USD ....................................................................................................... 38

Appendix 7 KLK Crop Age Profile ......................................................................................... 38

Appendix 8 Palm Oil Price vs USD Price ............................................................................... 39

Appendix 9 Crude oil Price 5 Years Trend .............................................................................. 39

Appendix 10 KLK's Top 30 Shareholders ............................................................................... 40

Appendix 11 IOI Comprehensive Income ............................................................................... 41

Appendix 12 IOI Financial Position ........................................................................................ 42

Appendix 13 KLK Comprehensive Income ............................................................................ 43

Appendix 14 KLK Financial Position...................................................................................... 44


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List of Charts

Chart 1 Gross Profit Margin of IOI & KLK for FY2013 & FY2014 ...................................... 16

Chart 2 Operating Profit Margin for IOI & KLK for FY2013 & FY2014 .............................. 17

Chart 3 Expenses Margin for IOI & KLK for FY2013 & FY2014 ......................................... 17

Chart 4 Marketing & Selling Margin for IOI & KLK for FY2013 & FY2014 ....................... 18

Chart 5 Cost Structure Changes for IOI & KLK for FY2013 & FY2014 ............................... 18

Chart 6 Current Ratio for IOI & KLK for FY2013 & FY2014 ............................................... 19

Chart 7 Quick Ratio for IOI & KLK for FY2013 & FY2014 .................................................. 19

Chart 8 Debtor Collection in Days of IOI & KLK for FY2013 & FY2014 ............................ 20

Chart 9 Creditor Payment in Days of IOI & KLK for FY2013 & FY2014 ............................. 20

Chart 10 Gearing Ratio of IOI & KLK for FY2013 & FY2014 .............................................. 21

Chart 11 Interest Cover of IOI & KLK for FY2013 & FY2014 .............................................. 21

Chart 12 EPS of IOI & KLK for FY2013 & FY2014.............................................................. 22

Chart 13 ROCE of IOI & KLK for FY2013 & FY2014 .......................................................... 22


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List of Tables

Table 1 PV ............................................................................................................................... 27

Table 3 Cash Surplus ............................................................................................................... 28

Table 4 NPV ............................................................................................................................ 28

Table 5 IRR .............................................................................................................................. 28

Table 6 Payback Period ........................................................................................................... 29

Table 7 Profitability Ratios ...................................................................................................... 45

Table 8 Liquidity Ratios .......................................................................................................... 46

Table 9 Efficiency Ratios......................................................................................................... 46

Table 10 Capital Structure Ratios ............................................................................................ 47

Table 11 Investors Ratio .......................................................................................................... 47


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List of Abbreviations

FGV - Felda Global Ventures

CPO - Crude Palm Oil

IOI - Industrial Oxygen Incorporated

RSPO - Roundtable on Sustainable Palm Oil

FY - Fiscal Year

IOIPG - IOI Properties Group Berhad

GBI - Green Building Index

IOI - IOI Corporation Berhad

PT Eagle High - PT Eagle High Plantations Tbk

GSB - Global Strategic Blueprint

M&A - Mergers & Acquisitions

R&D - Research & Development

OER - Oil Extraction Rate

US - The United States

USD - United States DollarMYR - Malaysia Ringgit

ECB - European Central Bank

QE - Quantitative Easing

CCE - Cash and Cash Equivalents

AR - Accounts Receivable

CL - Current Liabilities

AP - Accounts Payable

EBIT E i B f I t t & T


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Objectives

The objectives of this assignment are explained as below:

To examine critically on IOI and KLK business portfolios in identifying the strategic

fit as compared to FGVs Business Model.

To establish the main change on economic drivers and their impact on present and

future of both IOI and KLK.

To examine critically on IOI and KLKs financial performance and its strategic fit

against FGVs business model of 2015-2020.

To examine and analyze critically on the investment appraisal techniques.


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Investment Decision of FGV over Rajawali Group

Rajawali Corporation is owned by Peter Sondakh and it operates in different industry like

telecommunication, retail, transportation and also plantation where FGV has acquired 37%

stakes of one of its plantation subsidiary, Eagle High Plantations.

Although FGV is the largest CPO producer in the world, possessing more than 450000

Hectares of land, there are still shortcomings in the business where one of the major issues of

FGV is its crop age profile being too pessimistic as shown in Appendix 2. Furthermore,

FGVs performance was badly impacted due to low CPO prices, poor FFB production and

major flood crisis. According to an interview with Dato Emir Mavani Abdullah, CEO of FGV,

55% of FGVscrops are too old and thus GSB was implemented to maximize revenue and

achieve operation excellence, part of the transformation strategy is the merger acquisition

plan (Abdullah, 2015).

The land banks in Peninsular are full and thus the acquisition of the 3 rd largest plantation

company in Indonesia, EHP took place. The acquisition was proposed in paying cash of

2.37Billion for 30% stake while 95Million of FGV shares for the 7% stake in purchase for

425 000h f l d l d (Th St 2015)


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Company Background

IOI Corporation Bhd

IOI Corporation Berhad started off with industrial gas manufacturing then venture to property

industry followed by oil palm plantation industry. IOI has more than 30,000 employees that

come from more than 23 regions over the world (Lim, 2015). It operates on several business

clusters which are plantations, resources manufacturing and property development. Its majorrevenue earning contributing between 55 to 60% comes from its core business which is its

plantation sector followed by property development division. IOI is also part of RSPO and its

palm value chain comprises both upstream and downstream where upstream works on

seeding, planting and extraction of crop oil till downstream activities which is also known as

resource-based manufacturing division. This division operates and manufactures palm oilrefining, oleo chemical engineering and production of fats and specialty oils. On the other

hand, its property subsidiary, IOIPG has outstanding achievement and is ISO9001:2008

standards and GBI certified. Based on IOIs plantation sector financial performance,

comparing its FY2013 and FY2014; it has an increment of 12% operating profit in its

upstream and 30% increment in its downstream division. IOI adapts vertical integrated


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Kuala Lumpur Kepong Bhd

KLK started off as a plantation company a century ago and is still maintaining plantation

sector as its core business. KLK also operates on rubber plantation, retailing and also similar

with IOI, property development. The company has more than 38,000 employees around the

globe and is the third largest palm oil producer in Malaysia. Similar to IOI, KLK adopts

vertical integrated business model with upstream and downstream manufacturing. It has

200597ha of plantations in Malaysia, Indonesia and Liberia, accounting to 93% oil palm

plantation while remaining 7% are rubber plantations which its operations will soon be

ceased. KLK has 39% prime crops while young and immature ones total to 44%.

Its resource-based manufacturing has expanded to other regions like China and Europe where

its oleo chemical engineering produces more products. Despite so, KLK remains focused atits competitive advantage product which is the fats and specialty oils production. One of its

major achievements is becoming the key supplier in Europe market, supplying oleo chemical

products and cost efficient projects are in progress. The company is also RSPO and ISO

certified, making it competitive against IOI and other market leading plantation corporations.


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Ansoffs Growth Matrix

Based on the previous acquisition and current consideration on purchasing either IOI or KLK,

FGV is pursuing related diversification via acquiring other related industry companies in

order to increase its shares, increase in economies of scale and benefit in experience curve

(Johnson, et al., 2008).

Increase in Value and Distribution network

Acquisition of such would also result in value and distribution network increase. KLK has

proven track of expansion as it is the key supplier of manufactured products to the Europe

market. IOI itself exports its manufactured products to over 60 countries globally. As such,

the distribution network will no doubt grow.

Economies of Scope

It is considerably to be in greater economies of scope as acquisition will bring more assets,

technology, resources and experiences which then results in better quality and efficiency.

However, there may be potential risk as consumers are already familiar with these products

d th b tit ti d t i th k t Th th k ti t t d


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Impact of Current Economic Conditions towards both Companies

US Economy Growth strengthens USD

Despite US having a slower growth in the earlier quarter of 2015 due to numerical factors

such as tough winter season, drop of oil prices and et cetera, US economy is still at its

growing course and USD is still at a run (Menton, 2015). As USD strengthens, IOI has

reported a drastic loss in revenue of RM19.60Million due to foreign exchange translation

losses in FY2014 (Chin, 2015).

Besides that, US Federal Reserves is anticipated to increase its interest rate. As the interest

rate increased, the demand for plantation products will be reduced as businesses growth will

slow down, causing lower demand which then impacts IOI and KLKs revenue. This is

shown in Appendix 7 where CPO is traded as commodities. It will be impacted as when USD

strengthens, commodities prices that are traded will drop; allowing customers to buy the

commodities at lesser dollars (Kowalski, 2015).

Global Price for CPO Declining


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Emerich (The Star, 2015). With the growth of euro zone economy, KLK as the key and

strategic supplier would benefit from it as demands would increase. IOI on the other hand

would benefit from the growth of euro-zone economy as IOI Loders Croklaan in Europes

research and manufacturing company would have increased revenue as well.

CPO Export Taxes in Malaysia re-imposed

The CPO export taxes are recently re-imposed and this will benefit plantation companies who

suffer margin loss ever since its export tax suspension and poor upstream activities (The Star,

2015). This taxation of 4.5% onwards will be applied to CPO exports and benefits those

plantation companies with exposure of downstream activities such as IOI and KLK. Thus, the

revenue of IOI and KLK exports will grow. As CPO prices are estimated to perform better,

IOI and KLKs upcoming quarter would be more promising.


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Financial Performance and Strategic Fit Evaluation of IOI and KLK

Limitation on Financial Analysis

Distorted Figures of IOI

The figures shown in IOIs annual report is distorted as a major demerger was happening in the

organization. Thus, the figures shown and analyzed may not represent the real situation.

Shareholder Ownership

IOIs main shareholder is VC which is wholly owned by PH whereby it is own by IOIs

founder, Tan Sri Dato Lee Shin Cheng and his family. There may be conflict of interest in

terms of achieving shareholders or employees interests. (Heil , 2015)

Inconsistence Data Comparison

IOIs FY ended on 30thJune while KLKs ended on 30thSeptember. Inconsistency in

comparison of both companys data may lead to inconsistent and inaccurate evaluations

Ratio Analysis of both IOI and KLK

P fi bili R i


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East Kalimantan. Furthermore its profit is affected as well due to chronic theft in its most productive

region, Indonesia.

Chart 2 Operating Profit Margin for IOI & KLK for FY2013 & FY2014

IOI has an increase in its operating profit margin of a slight 0.9% whereas KLK decreased its

operating profit margin by 1.29%. IOIs improved OPM is due to its higher sales volume and margins

from oleochemical section.

KLK itself vice versa had a decrease in its OPM. This may be the result of ineffective cost


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Chart 4 Marketing & Selling Margin for IOI & KLK for FY2013 & FY2014

This further depicts the expenses in terms of marketing and selling. There was a decrease in

IOIs by 0.35% which is relatively good result of cost efficiency mainly due to lower

expenses on its fair value and realised fair value losses of investments. As for KLK, it has a

great decrease as well at 0.48%. It actually has a slight increase in its expenditure, but this

may be offset by its higher sales revenue as compared to previous year.


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Chart 6 Current Ratio for IOI & KLK for FY2013 & FY2014

IOIs current ratio has dropped from a stunning 7.26 to 2.11. There was a major decrease incurrent asset because of the demerging of IOIPGs into separate entities. As for KLK, there is

also a decrease in its current ratio of 0.51 with a slight increment in its current assets while an

increase in its current liabilities especially in its borrowings.


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Efficiency

Chart 8 Debtor Collection in Days of IOI & KLK for FY2013 & FY2014


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Capital Structure

Chart 10 Gearing Ratio of IOI & KLK for FY2013 & FY2014

In year 2014, IOI has an increased gearing ratio from 52.60% to 120.70%. This is due to the

changes in share reserves whereby IOI re-purchase some of their shares from the open market

by their own funds and a loss in its foreign currency translation. This represents that IOI has a

greater risk in terms of financial leverage. KLK itself has an increment as well which hits

35.60% in year 2014. The increment is most likely caused by its borrowings as mentioned


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Investors

Chart 12 EPS of IOI & KLK for FY2013 & FY2014

IOIs EPS value was taken only from its continuing operations. It had a slight decrease due to

its profit attributed had decreased. As for KLK, it had an increment to 0.931 because they had

an increment in its profits as compared to 2013.


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Strategic Fit of both companies towards FGV Business Model

IOI Strategic Fit towards FGV

IOI operates in a vertically integrated business model as shown in Appendix 5. Its business

model comprises activities from upstream till downstream which fully leverages its value

chain.

Assuming FGV acquiring IOI, there will be obvious revenue enhancement. This is because

IOI has very good crops age profile of average 12.5 years lifecycle where 60% are prime

crops whereas 23% are young and immature crops as shown in Appendix 3. This will

definitely meet FGVs objective in increasing FFB yield that will result in higher sales and

achieving optimum crop age. Acquisition as such would also increase land banks as IOI has

175,000ha planted lands and 25,000 balance of unplanted land banks.

Besides this, IOI is currently undergoing divestment of its non-core assets. According to

IOIs Annual Report, IOIPG is separated from IOI to become a separate entity in year 2014

(IOI Annual Report 2014, p. 8). This will result in IOI focusing purely on its core activity,

l i d f i f l i hi h h l d dd l


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KLK Strategic Fit towards FGV

KLK operates similarly with IOI and FGV which is in vertical integrated business model as

shown in Appendix 4. However, KLK focuses more on the downstream which is

manufacturing of oleo chemicals. Nevertheless, with plantations and manufacturing, KLKs

value chain is still worthy.

Assuming FGV acquiring KLK, operational excellence can be achieved whereby KLK has

good crop age profile of 39% are prime whereas 44% of young and immature crops; only 17%

are old which is shown in Appendix 6. The average ages of crops are 11 years, slightly better

than IOI. KLK has 270,000ha of land banks where 93% of it is used for plantation while

remaining 7% is for rubber plantation. Though not having any land bank balance, KLK has

plans for expansion in future by acquiring companies with land banks. Besides this, R&D

department with the role of introducing innovative use of technology has been supporting the

plantations with oil palm tissue culture, enhancement in fertiliser use which results in higher

OER.

Besides this, cost optimization may be achieved as well as KLK has proven result on


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Acquisition Recommendation

After analyzing both companies in terms of their financial performances and strategic fit

towards FGVs Business Model, it is recommended that FGV would acquire IOI. This is

because IOI has an amazing crop age profile which FGV is currently critically in need of

upstream supplies. Besides that, its demerger activity would allow IOI itself to focus on its

single entity which is plantation, realizing quality control. Its manufacturing division also

gives manufacturing excellence and with such combination to FGV, it would benefit FGV

and push the organization to a brand new level. Acquisition would also bring more assets

such as unutilized factories to FGV for its perusal. As such, FGV have a bigger output on

FFB, more capacities to manufacture and an even wider distribution network. Although KLK

has its established distribution network in Europe, the Euro zone economy is still unstable

despite efforts have been taken into place.

Furthermore, FGV is looking for new land banks and IOI has a remaining of 25,000ha and

there are plans to plant in recent future. KLK on the other hand does not have free land banks

and 7% of their total land banks will only be free for replanting after they cease their rubber

plantation division, which may take up to few years at least.


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for FGV to predict on its price. Thus, FGV has to consider if an LLA or a total acquisition

over IOI would be cost saving.


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Critical Evaluations on Investment Appraisal Techniques

This segment will talk about investment appraisal techniques as to how acquisitions should

be evaluated and are based on what techniques, in order to achieve the objectives of

maximizing shareholder profit.

Assuming a company will acquire an investment at RM8Million. This will expect to provide

surplus of cash flows every year for a period of 5 years planning horizon of the company.


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Table 2 Cash Surplus

Future Cash Flow Surplus

= Net Cash Flows for each time period X Discounting Factors at 15%

= Present Values of net cash flows @ 15% Required Rate of Return

Table 3 NPV

NPV = PV of Investment + PV of net cash flows


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Table 5 Payback Period

Payback period = 3.11 Years


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Benefits of NPV

Recognizing the future cash flows risk

Gives the thoughts of value of money today is worthy than the same amount of money

received in future.

Weakness of NPV

As long as its value is greater than zero then it is a profitable investment. It may be

true but for NPV itself, it does not calculate the duration to achieve the NPV value

greater than zero.

It also assumes that capitals are abundant; without rationing of capital.

Benefits of IRR

Multiple IRRS can be done to calculate different changes in cash flows.

IRRS will not add each other which are good for evaluation, unlike NPV.

Limitations of IRR

As long as its value is greater than WACC, IRR stands to say that the project is

acceptable. Yet if the discounted rates changes annually, comparison will be distorted.


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Conclusion

The report has concluded the objectives along with ratio analysis and evaluation on

investment appraisals.

It has come to a conclusion that FGV should acquire IOI as it has strategic fit towards FGVs

Business Model. Besides this, the collaboration of this two will add value to FGVs value

chain due to IOIs manufacturing excellence and outstanding crop age profile which is what

FGV critically in need to improve their crop profiles.

The investment appraisals may give decision makers figures and assist in decision making.

However, there may be contemporary issues that may distort the decision outcomes such as

social issues or being too overconfident in an acquisition decision.

Nevertheless, financial analysis and strategic fit plays an important role in providing decision

makers figures and understanding on the acquisition.


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References

Abdullah, Dato Mohd Emir Mavani. REPAIRING TORN REPUTATIONS. 2015. radio.

Anil M. Pandya, Narendar V. Rao. (1998). Diversification and Firm Performance: An

Empirical Evaluation. Available: http://akbareftekhari.ir/fa/Files/Paper/pandya.pdf. Last

accessed 6th July 2015.

Anon. (2015).Evaluating Cash Flow Results.Available: http://www.money-zine.com/investing/investing/evaluating-cash-flow-results/. Last accessed 7th July 2015.

Chuck Kowaski. (2015).How the Dollar Impacts Commodities.Available:

http://commodities.about.com/od/researchcommodities/a/How-The-Dollar-Impacts-

Commodity-Prices.htm. Last accessed 7th July 2015.

FGV to buy 37% of PT Eagle High Plantations for RM2.55bil. Available:

http://www.thestar.com.my/Business/Business-News/2015/06/12/FGV-to-buy-37-pc-of-PT-

Eagle-High-Plantations/?style=biz. Last accessed 7th July 2015.

FGVCorp2014, Annual Report 2014, Felda Global Venture Bhd, Malaysia.

Hanim Adnan. (2015). CPO export tax brings cheer to palm oil refiners.Available:

http://www.thestar.com.my/Business/Business-News/2015/04/04/CPO-export-tax-brings-

cheers-to-palm-oil-refiners/?style=biz. Last accessed 7th July 2015.


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Lim Cian Yai (2015) Tycoon with the golden touch, Available

at:http://www.theantdaily.com/Main/Tycoon-with-the-golden-touch(Accessed: 6th July 2015).

Negligible impact from lower palm oil and rubber prices.Available:

http://www.focusmalaysia.my/Markets/Negligible%20impact%20from%20lower%20palm%

20oil%20and%20rubber%20prices. Last accessed 6th July 2015.

Ranking the world's best - and worst - palm oil companies in terms of

sustainability.Available: http://news.mongabay.com/2014/1120-palm-oil-sustainability-

rankings.html. Last accessed 5th July 2015.

REA Finance. (2015). CPO Price.Available: http://www.rea.co.uk/rea/en/markets/cpoprices.

Last accessed 6th July 2015.

Russ Koesterich. (2015).Deflationary Pressures in Europe Led to Quantitative

Easing.Available: http://marketrealist.com/2015/03/deflationary-pressures-europe-led-

quantitative-easing/. Last accessed 6th July 2015.

[email protected]. (2015).FGV to acquire four Indonesian plantation firms for

RM2.61b.Available: http://www.thesundaily.my/news/1459224. Last accessed 7th July 2015.

The Star. (2015).KLK buying German company for Rm162Mil.Available:

http://www.thestar.com.my/Business/Business-News/2015/05/28/KLK-to-buy-German-

company-for-RM162mil/?style=biz. Last accessed 7th July 2015.


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Appendix

Appendix 1 FGV Business Model 2015 - 2020


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Appendix 3 IOI Crop Age Profile


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Appendix 8 Palm Oil Price vs USD Price


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Appendix 11 IOI Comprehensive Income


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Appendix 13 KLK Comprehensive Income


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45 | P a g e

Table 6 Profitability Ratios


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46 | P a g e

Table 7 Liquidity Ratios

Table 8 Efficiency Ratios


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47 | P a g e

Table 9 Capital Structure Ratios

Table 10 Investors Ratio

fgv acquisition plan: financial analysis on ioi and klk

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