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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.

ALEXIS CHOO XIN NIE


0131GKIGKI0415

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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
acquisition and will aid in the presentation towards RSPO Roundtable Conference.

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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 ................................................................................................................... 13
Increase 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
Global Price for CPO Declining ....................................................................................................... 14
ECB launch on QE plans .................................................................................................................. 14
CPO Export Taxes in Malaysia re-imposed ...................................................................................... 15
Financial Performance and Strategic Fit Evaluation of IOI and KLK .................................................. 16
Limitation on Financial Analysis ...................................................................................................... 16
Distorted Figures of IOI ................................................................................................................ 16
Shareholder Ownership ................................................................................................................. 16
Inconsistence Data Comparison .................................................................................................... 16
Ratio Analysis of both IOI and KLK ................................................................................................ 16
Profitability Ratio.......................................................................................................................... 16
Liquidity Ratios ............................................................................................................................ 18
Efficiency ...................................................................................................................................... 20
Capital Structure ........................................................................................................................... 21
Investors ........................................................................................................................................ 22
Strategic Fit of both companies towards FGV Business Model ........................................................... 23
IOI Strategic Fit towards FGV .......................................................................................................... 23
KLK Strategic Fit towards FGV ....................................................................................................... 24
Acquisition Recommendation ........................................................................................................... 25
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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
CPO
IOI
RSPO
FY
IOIPG
GBI
IOI
PT Eagle High
GSB
M&A
R&D
OER
US
USD
MYR
ECB
QE
CCE
AR
CL
AP
EBIT
EPS
GPM
OPM
EM
IMTN
VC
PH
LLA
WACC

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Felda Global Ventures


Crude Palm Oil
Industrial Oxygen Incorporated
Roundtable on Sustainable Palm Oil
Fiscal Year
IOI Properties Group Berhad
Green Building Index
IOI Corporation Berhad
PT Eagle High Plantations Tbk
Global Strategic Blueprint
Mergers & Acquisitions
Research & Development
Oil Extraction Rate
The United States
United States Dollar
Malaysia Ringgit
European Central Bank
Quantitative Easing
Cash and Cash Equivalents
Accounts Receivable
Current Liabilities
Accounts Payable
Earnings Before Interest & Tax
Earnings Per Share
Gross Profit Margin
Operating Profit Margin
Expenses Margin
Islamic Medium Term Notes
Vertical Capacity Sdn Bhd
Progressive Holdings Sdn Bhd
Land Lease Agreement
Weighted Average Cost of Capital

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 FGVs crops 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 3rd 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
over 425,000ha of leased land (The Star, 2015)
The strategic fit between FGV and EHP was stated clearly by CEO of FGV where EHP
would provide cost optimization in terms of cheaper plantation upstream cost and operational
excellence where there will be replanting project to improve optimum crop age profile for
FGV as its current young age profile will be able to complement to FGVs old crops. Vice
versa, FGV will benefit EHP with frontline technology, expertise in downstream activities
and international blueprint achievements (The Star, 2015). This will no doubt add value to
both corporates value chain. Additionally, the replanting would increase FFB productions
which in turn increase sales, achieving FGVs business model target, enhancing revenue.

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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 major
revenue 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 oil
refining, 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
business model where the upstream products are used as resources in downstream
manufacturing. This will add value to the products that are made along the value chain.
According to Butler, IOI is ranked 6th in the world in terms of sustainability whereas KLK is
ranked at 9th place (Butler, 2014).

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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 at
its 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
and there are many substitution products in the market. Thus, the marketing strategy used
must be effective in gaining customer trust.

Competitive Advantage
Diversification of business will eliminate a competitor in the market as both IOI and KLK is
specialist in plantation industry as well. Therefore, the diversification that achieves
economies of scope would then give FGV a competitive advantage of being a bigger and
stronger firm in terms of sharing assets, customers, knowledge and production.

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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


For the first quarter of 2015, both IOI and KLK reported a struggle in production due to
lower CPO selling price which is shown in Appendix 8. Economist in Malaysia, Mottain
stated that the low CPO price would not make huge impact to the countrys economy as
export of CPO is only 6% (Mottain, 2015).However, for companies like IOI and KLK, it
directly hits them as it is their core business; worse when the FFB output was more than
expected. Low CPO price has made IOI suffered a profit loss of 4% from RM310.2Million to
RM297.3Million as compared to previous year (Chin, 2015). KLK on the other hand suffered
a decline in profit of 45.2%, from RM288.5Million to RM157.9Million.

ECB launch on QE plans


ECB has announced its plan to purchase euro zone government bonds in order to control
euros bad inflation which is at -0.2% in December 2014 (Barnato, 2015). This allows large
sum of money to be injected into euro market especially banks in search of credit growth and
banks investing in more stocks (Koesterich, 2015). As such, it estimates a growth of 1.5% in
2015 which will also allow businesses to have more funds to invest and grow their company.
KLK has a significant market in Euro as it recently acquired German oleochemical company,

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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 30th June while KLKs ended on 30th September. Inconsistency in
comparison of both companys data may lead to inconsistent and inaccurate evaluations

Ratio Analysis of both IOI and KLK


Profitability Ratio

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

The Gross Profit Margin of IOI is 18.12% in 2013 while 22.53% in 2014. It has increased by 4.41%.
This is mainly due to higher CPO and palm kernel prices as well as higher percentage of FFB
productions thus better revenue. This indicates that IOI is in a healthy financial status.
For KLKs GPM, it is 21.32% for 2013 and 19.07% for 2014 which is a decrease. Although there is
an increase in its revenue, the cost of sales had a dramatic increase as well which affects its gross
profit margin. It may be due to higher transportation cost in remote areas of Central Kalimantan and
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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
management whereby its distribution costs and administration expenses had increased in a year.

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

Both GPM and OPM lead to this Expenses Margin where GPM OPM. IOI has an increase in its EM
from 4.03% to 7.61%. This is because IOI has a stunningly increased profit in 2014 as compared to
2013 while its OPM did not changed much. As for KLK, it was 7.46% in 2013 then dropped to 6.50%
in 2014. This is because it had a poorer GPM in 2013 which caused the changes.

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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.

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

IOI has an effective decrease in its administration expenses since it has an internal streamline
of its operation, yet with lower sales; the expenses had seen an increase to 4.17%. KLK itself
has a significant drop of 0.70% since its administration expenses actually remained the same
but had higher sales.
Liquidity Ratios

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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 in
current 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.

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

Quick Ratio depicts that IOI has decreased to 1.50 in 2014 which is due to better funds and
deposits yet a rather higher current liabilities due to high borrowings whereby IOIs subsidy,
IOI Investment started EMTN Programme which is of USD1.5Billion. On the other hand,
KLK also has a drastic decrease to 1.07 in year 2014. It has a lower cash equivalent but
higher current liabilities as well due to borrowings to support its IMTN Programme.

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Efficiency

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

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

Based on the two ratios, IOI has an unhealthy efficiency ratio as it will take 35.6 Days to
collect from debtors while only giving itself 34.3 Days to settle all its outstanding payments.
However, this was deemed to be better compared to 2013. KLK itself has improved debtor
ratios of 36.1 Days with 40.5 Days given to it to clear off its debts.

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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
earlier.

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

Despite of an increment in the taxes, both IOI and KLK had reduced interest cover which is
caused by increased EBIT. This means that both IOI and KLK have the ability to cover the
interests charged over their debts.

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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.

Chart 13 ROCE of IOI & KLK for FY2013 & FY2014

IOI increased its ROCE drastically to 11.6% as it had a major drop in its total assets due to its
demerger of IOIPG which then makes IOI being more efficient use on its single entity. KLK
increased slightly to 10.90% due to its higher operating profit and total assets but
achievements are not as comparable to IOI.

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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,
plantation and manufacturing of plantation resources which has already proven to add value
to its value chain; will also add value to FGVs if acquired, achieving cost optimization.
Relating to IOIs value chain, since its demerging of IOIPG, IOI has full focus on plantation
and resource-based manufacturing which gives it complete quality control at all times,
resulting in Manufacturing Excellence which adds more value to the value chain.
Furthermore, IOI can assist FGV in achieving operational excellence via the innovative use
of modern technology especially in its resource-based manufacturing. According to IOI
Annual Report 2014, the technology division continues to work on modern and green
technology to reduce pollutions and impact towards the environment (IOI Annual Report
2014, p. 49). Besides this, IOI plans to plant on the remaining 25,000ha lands in few years
which suits FGVs objective in achieving operational excellence via replanting programme.
If IOI was acquired, it will be a related diversification of backward integration whereby the
acquisition is not only on the supply of crops and land banks, also on the capacity of factories.
IOI only utilized around 60% of its factories. If the acquisition is done, FGV may use the
remaining factories to produce supplies. Such factory optimisation will bring down the
operating cost.
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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
reducing production cost via labour force efficiency and lower fertilizer price. In spite of this,
cost may be further reduced if the problem of chronic theft and yield improvement activities
can be tackled effectively. KLK has plans to divest its rubber plantations sector as well, due
to not having any motivator to spark the market and low earnings. Thus, KLK would be fully
focusing on oil palm plantations and its diversified business, property development. This will
also increase its value of value chain since its manufacturing division parked under
downstream activities is at its excellence manufacturing state.
KLK may fulfil on enhancing revenue for FGV as well as its FFB is increasing as a result of
effective use of modern technology and excellent performance in Indonesias production.
Besides this, KLK focuses highly on its manufacturing division whereby KLK expands to
other regions like Europe in becoming the key supplier, expanding plants in Dumai and
widening capacities of end products. With such expansion projects, higher sales, diversity
and development of new revenues in downstream are expected. As such, the collaboration
between FGV and KLK may result in improved technology due to excellence in R&D and
also good sales and marketing to sell its products to other parts of the world.

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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.
Based on the financial analysis, IOI also have a better control on its expenses as compared to
KLK. As such, it may strengthen FGVs assets and at the same time, neutralizes FGVs
expenses margin since being said as extravagance spending nature when acquiring others.
The ROCE indicator shows that IOI being stronger ever since becoming a single entity
whereas KLK seems to be at stagnant. As for the shares, if FGV acquired IOI, FGV will be
the substantial shareholders and will be stronger against other shareholders in FGVs like
Rajawali Group.
Nonetheless, during the period where CPO prices are dropping low, IOI still manage to grow
its profit margin while other competitor plantations like KLK suffered a loss, it means that
the organization is strong and has capability in it.

LLA Cost Savings


FGV may also opt to acquire IOIs land banks via LLA agreement. LLA agreement will
significantly reduce the acquisition price as FGV is only renting the land banks for perusal.
Having the cost saved, FGV will have more savings after spending much on previous
acquisition. However, this LLA may increase its price during renewal, which it will be tricky

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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.

Table 1 PV

The Cost of Capital for this project which is computed by the Finance Department would be
15%.
PV = Future Cash Flow @ tn/ (1+r)^n
Where r = Required Rate of Return
N = time period
Discounting Factor

= 1/(1+r)^n
= 1/1.15 = 0.8696

PV = RM1,500,000 * 0.8696 = RM1,304,400. It does give a positive PV value.


NPV Schedule
This shows if the projected cash flows gives returns equally or greater than the Required
Return.

Present Value of Investment = -8,000

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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

Profitability Index
This concludes if the NPV is strong against upfront investment.

Profitability Index = Net Present Value / Present Value of Investment


=
2803.6 / 8000
=
0.3505
Internal Rate of Return
This will tell us on the exact % return from the projected cash flows.

Table 4 IRR

From the table, IRR

= Future Cash Flow Surplus all the investments with 20%


= 26%

This means that IRR = 26% provides a margin of safety = 26% - 15% Required Return = 11%
Payback Period

This shows the number of years needed in order to recover the invested initial capitals.

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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.

Benefits of Profitability Index

Gives the same result as NPV.

Based on profitability index, investors may rank their investments.

Limitations of IRR

No time period specified on when investor can achieve positive cash flow.

Benefits of Payback Period

Easy to be computed and easily understood by non-financed managers

Longer paybacks will gives a higher risk

Limitations of Payback Period

Ignoring cash flows that may occur after the payback period as it does not calculate
further.

Does not let the investors know what happens after the payback period has reached.
(Money-Zine, 2015)

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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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Appendix

Appendix 1 FGV Business Model 2015 - 2020

Appendix 2 FGV Crop Age Profile

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Appendix 3 IOI Crop Age Profile

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Appendix 4 KLK Business Model

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Appendix 5 IOI Business Model

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Appendix 6 MYR vs USD

Appendix 7 KLK Crop Age Profile

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Appendix 8 Palm Oil Price vs USD Price

Appendix 9 Crude oil Price 5 Years Trend

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Appendix 10 KLK's Top 30 Shareholders

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Appendix 11 IOI Comprehensive Income

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Appendix 12 IOI Financial Position

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Appendix 13 KLK Comprehensive Income

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Appendix 14 KLK Financial Position

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Table 6 Profitability Ratios

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Table 7 Liquidity Ratios

Table 8 Efficiency Ratios

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Table 9 Capital Structure Ratios

Table 10 Investors Ratio

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