Fima’s legal tussle in Indonesia won’t impact FY18 earnings

This article first appeared in The Edge Financial Daily, on August 28, 2017.

The question of whether its subsidiary will retain the rights to cultivate oil palms on some 3,691.9ha of land in Kalimantan Timur, Republic of Indonesia (RI) — which makes up some 49.4% of Fima Corp Bhd’s total plantation land — is still hanging in the balance.
But the group remains optimistic as its plantation segment is still set to drive earnings for its current financial year 2018 (FY18), which will end on March 31, 2018.
The reason is simple. It expects its 80%-owned unit PT Nunukan Jaya Lestari’s legal challenge to the Indonesian government’s revocation of its rights to cultivate those lands to take about a year to resolve. PT Nunukan’s contribution made up some 53% of the group’s turnover in the first quarter of FY18 (1QFY18), and about 80% of the quarterly profit before tax (PBT).
“For this financial year (FY18), the plantation segment will be the earnings driver of the group. The ongoing appeal against the decision of the state administrative court is still pending. Nonetheless, our Indonesian subsidiary PT Nunukan has been allowed to continue to lawfully operate the plantation operations until the final determination of the suit by the Indonesian court,” Datuk Roslan Hamir, Fima’s managing director, told The Edge Financial Daily after the group’s annual general meeting last week.
“It will take about a year for the outcome to be determined and we think it will not affect our FY18’s results.”
The bullish outlook for its plantation segment came amid improved performance at its palm oil production and processing business, as evidenced in 1QFY18, where PBT of the segment more than doubled to RM10.3 million compared with RM5.12 million in the same quarter last year.
At end-October last year, Fima announced that the RI government had revoked PT Nunukan’s cultivation rights, with immediate effect. Fima, via wholly-owned FCB Management Sdn Bhd, paid RM13 million to get a 32.5% stake in PT Nunukan in June 2006, and upped that stake to 80% for another RM83 million about a year later.
The RI government charged that the rights granted to PT Nunukan were improperly issued due to administrative irregularities at the time the rights were granted in 2003, resulting in parts of the area within the title given to PT Nunukan to overlap with forestry areas.
While Roslan gave the assurance that there is no immediate concern about the outcome of the legal proceedings, he said the group will work hard to protect PT Nunukan’s rights and interests in Indonesia.
“In the event the Court of Appeal decides in favour of the state administrative court, PT Nunukan will submit an appeal application to the Supreme Court. The board will pursue all available legal avenues to protect PT Nunukan’s rights and interests,” the group previously pledged the same when the Minority Shareholders’ Watchdog Group questioned Fima in a letter dated Aug 16 this year on its contingency plan if it loses the appeal.
But notwithstanding the improvement in its plantation business so far, Fima posted a year-on-year decline of 36.5% in net profit for its 1QFY18 to RM9.1 million from RM14.3 million, as revenue slid 4.9% to RM79.15 million from RM83.2 million.
Roslan shared this was because its manufacturing segment was impacted by the expiry of a supply contract related to the production of travel documents.
Fima’s manufacturing division is involved in the production and trading of security and confidential documents, which include certificates and passes, stamps, postal and banking documents, and travel documents. Travel documents alone comprised about 54.3% of the manufacturing division’s turnover in FY17.
According to Roslan, the group is in talks with partners to meet rising demand for technology-driven identification documents (IDs) and security solutions. However, he does not expect anything to materialise soon given that it will likely take at least a year to progress from current discussions.
“The division is focused on adapting our businesses to ensure that we keep pace with dynamic and accelerating market trends, and offset the decline in our traditional security printing segment,” he added.
In FY16 and FY17, the manufacturing segment contributed about 69.9% and 97.2% of the group’s PBT.
Nonetheless, Roslan pointed out that setbacks in fresh fruit bunch were due to the blistering hot El Nino which is now over and the recovery in yield and stable crude palm oil price will help the plantation segment take over the baton from manufacturing as the group’s key earnings driver in FY18.
Yield fell from 24.4 tonnes per hectare (ha) in FY13 to a low of 20.6 tonnes per ha in FY17. According to Roslan, yield should recover to between 23 tonnes to 24 tonnes per ha for FY18.
He also pointed out that the healthy age profile of its total planted areas of 7,480.6ha will be an advantage to Fima.
Meanwhile, with its strong balance sheet and cash balance of RM263.5 million as of June 30 this year, the group is looking for opportunities to increase its plantation land bank.
In FY17, Fima’s PBT would have improved by 17.2% from FY16’s if not for the impairment losses on PT Nunukan as a result of the ongoing legal tussle. Instead, its PBT retreated 20.8% to RM61.3 million from RM77.3 million in FY16 after booking the impairment.