Investors in Golden Palm Growers are the latest casualties as the management company proposes early termination.
– The lure of oil palm farm-sharing interest schemes
– Increasing premature scheme terminations when plantations are in their prime age
– Will investors be able to recover their investments?
THE lure of putting money into oil palm plantations has been intense.
Compared to other investments, they are relatively easy to manage and will provide steady cashflow for 20 years after the initial five years of the trees growing.
However, the drawback is the heavy capital investment upfront for purchasing land to plant the palms.
In this environment, in recent years, oil palm farm-sharing interest schemes have emerged as a popular alternative investment choice for those seeking direct exposure to the oil palm plantation sector.
The schemes offered guaranteed returns of about 6%-8% per year, plus a bonus. The entry level investment starts from as low as RM5,000 in return for owning a plot in a large oil palm plantation.
On paper, the investment seems too good an opportunity to be missed. It allows for constant cashflow from the harvest of oil palms and investors gaining from the long-term appreciation of the value of the plantation itself.
Moreover, the interest schemes are regulated by the Companies Commission of Malaysia (CCM) and have trustees, as required under Section 90 of the Companies Act 1965.
To put it in perspective, it is undeniable that most oil palm schemes in Malaysia have diligently rewarded their investors with good annual returns in the first five to seven years of the schemes’ existence, says an industry observer.
This created a sense of confidence among the investors to make additional purchases of the grower plots. It is believed that some investors even ended up owning more than five plots at one go.
However, there seems to be a pattern emerging that does not allow investors to ride on the long-term asset appreciation of the plantation.
As the plantations under the schemes reach their prime age of eight to 10 years, whereby the fresh fruit bunch (FFB) yields start to increase, there is a tendency for scheme operators to abruptly call for an early or premature termination of the scheme.
The first case was Country Heights Growers Scheme, Malaysia’s first oil palm farm-sharing scheme, which folded four years ago.
The latest casualty is Golden Palm Growers Scheme (GPGS). On Sept 6, its management company Golden Palm Growers Bhd proposed for an early termination of the 27-year scheme, which has been in operation for seven years.
A general meeting with its investors will be held on Monday to discuss the fate of the scheme.
An important point to note is that the success of any oil palm scheme is dependent on how well the management company manages the oil palm plantations.
The key indicators are its cost of production per tonne crude palm oil (CPO), the age profile of the palm trees and the FFB yields. These are the standard benchmarks that determine the valuation of a plantation and its appreciation over time.
In the case of GPGS, its management company in its notice to investors tagged the valuation of its 11,000-acre plantation in Gua Musang, Kelantan, at RM220mil.
However, industry experts feel that the price of the 11,000 acres is much higher than the RM220mil.
An industry expert says the valuations of plantation landbank in Peninsular Malaysia are about 20% to 40% higher than those in Sabah and Sarawak.
He says prime brownfield plantations in Peninsular Malaysia, on average, could fetch about RM75,000 to RM80,000 per ha, while those in Sabah about RM60,000 to RM65,000 per ha.
In Sarawak, as most of the plantations are planted on peatland, the valuation could be lower in the RM50,000 per ha range.
“For new startups, many cannot cope with the rising cost of production, which can be as high as RM2,000 per tonne of CPO, especially due to their young palm trees. More so with inefficient small estates, which cannot hit their targeted 23-25 tonnes per ha per year in terms of yield,” he explains.
An industry observer says: “I believe it is unlikely for GPGS’ prime oil palm plantation to cost only about RM20,000 to RM22,000 per acre. Even at a remote location like Gua Musang, I think it should fetch around RM40,000 to RM50,000 per acre.”
To recap, Golden Palm Growers designated 11,000 acres of land in Gua Musang for the scheme.
As at Aug 20, 2017, a total of 26,550 Grower Plots (60.3%) under the scheme had been sold to investors, while the management company retained the remaining 17,450 Grower Plots (39.7%).
To date, investors have ploughed an estimated RM212.4mil into the scheme and pocketed a 6% dividend plus a bonus of 2% during the first two years of their investment since GPGS made its debut in August 2010.
But in the past four years, it was reported that investors had only earned a 6% dividend minus the bonus.
The question of valuation of the 11,000 acres will be at the forefront of investor deliberation at the meeting on Monday to determine the termination of the scheme.
Is RM220mil a fair value for the 11,000 acres of plantation? For early termination to happen, the scheme operator will need 75% approval from investors attending the meeting in person or by proxy to agree with the resolutions.
Based on the latest filing with CCM, Golden Palm Growers posted a net loss of RM23.98mil for the financial year ended June 30, 2016 on the back of RM3.48mil in revenue.
The management company was unable to make payment obligations of repurchase requests from the growers of up to RM22mil and RM18mil for net yields payable to the grower investors.
In its notice to investors, the scheme operator said failure to make these payments would result in the scheme being liquidated and wound up.
Hence, the grower investors will be at risk of losing their investment should the land concession owner, Perbadanan Pembangunan Ladang Rakyat Negeri Kelantan, terminate the 90-year concession agreement due to Golden Palm Growers being insolvent or in default of the agreement.
Therefore, the management company is proposing for an early termination to ensure investors benefit from a sale of the plantation and get back 100% of their initial investment.
Meanwhile, the Minority Shareholder Watchdog Group (MSWG) is of the opinion that the location of the plantation cannot be seen as the main issue that forced Golden Palm Growers to go for early termination.
Its general manager Lya Rahman says: “We believe proper studies and due diligence on the scheme, which includes the location, should have been carried out before the scheme was launched.”
Another reason in question is the inability of the management company to meet its payment obligations to the grower investors.
This includes the yield of a minimum of 9% when the CPO price is above RM1,500 per tonne, which in total is estimated to be about RM18mil, and the repurchase obligation which started from Aug 20, 2016, subject to a cap of 10% of the total number of grower plots held by the public amounting to about RM22mil.
For MSWG, the most serious concern is the inability of GPGS to pay back fully to the investors the principal sum of money invested, and also the investors not being able to receive the latest annual net yield as originally promised under the scheme.
MSWG also views it seriously that the management of GPGS might have mismanaged the company, resulting in its value being destroyed or eroded.
With the early termination, Lya says MSWG is concerned whether the plots held by the management company would have equal rights as the investors/growers pertaining to the distribution of the net proceeds, as well as the voting rights on the proposals.
“Why would the management company continue to sell more plots in 2016 if it could be established that they had known then that the scheme was facing several problems and challenges, and that its viability would be very doubtful.”
According to Lya, MSWG at the request of the operator of Golden Palm Growers had arranged for a meeting, but was disappointed because questions raised at the meeting were not addressed by the operator.
Instead, the operator stated that all questions would be answered during the meeting on Monday.
Hence, MSWG is advising the affected investors of the scheme to attend the meeting and ask pertinent questions including how the net proceeds would be distributed – by Grower Plots created or by Grower Plots sold; the amount of the reserve funds kept by the trustee, MTrustee Bhd; and whether this reserve fund would be distributed upon the closure of the scheme and would investors be able to recover 100% of their investments within 12 months as proposed if they vote in favour of Resolution 1.
Seeking fair value