When is a cover-up not a cover-up? When it’s a willingly worn blindfold.

On June 28, a palm-oil producer by the name of Felda Global Ventures Holdings completed its initial public offering in Malaysia. This is hardly news that would set eyebrows twitching, were it not for the venture’s sheer size. At $US3.1 billion, it is Asia’s largest-ever IPO, and the second biggest on the planet this year following Facebook’s messy May listing.

Indeed, as Facebook shares plummeted faster than Mark Zuckerberg’s reputation once did with the female population of Harvard, Felda was a bewitching good-news story. It wasn’t just a successful listing in Asia, where high-profile offerings from the likes of Formula 1 had recently been delayed. It came during a worldwide IPO slowdown, while the European debt crisis rumbled just loud enough to mask the sound made by China’s slowing economy.

With the prevailing gloom, it is little wonder that the bulk of the reports and reportage surrounding Felda were positive, and tended to involve lustful descriptions of the IPO’s dimensions. While the odd cautionary note was sounded, these tended to focus on the company’s fundamentals, with one notable exception — a Dutch research house called Profundo.

In its report, released two weeks before the Felda IPO, the Profundo team did what no other analysts had done: they examined the sociopolitical environment surrounding the listing, and found that potential investors faced significant environmental, social and governance risks that are likely to metastasise into financial hazards. Profundo’s conclusions include:

  • Tensions between Felda’s ambitions and the Malaysian rural poor are rising because of alleged systemic undervaluation of oil-palm fruits and the use of power politics to grab land.
  • The company does not have a strong sustainability record, with only 3% of its landbank certified by the Roundtable on Sustainable Palm Oil.
  • Malaysia’s ruling political party, UMNO, controls company management and lines up state-controlled investors to inflate share demand.
  • Yields are below average and half the plantations need to be replanted, which will require much larger investments than those projected.

And, most damningly:

  • The IPO itself is likely to create new risks, as there is widespread fear that the government’s proceeds from the IPO will be used to buy a favourable result in the upcoming general elections, further undermining Malaysia’s fragile democracy.

Felda was set up in 1956 to provide land for low-income farmers from rural areas, which primarily involved oil-palm plantations. The profitability of these plantations saw the Malaysian government employ some impressive organisational prestidigitation — as Profundo explains, management critical of a potential IPO was moved aside, and the land was restructured to keep it away from the plows and pleas of settlers, particularly second- and third-generation descendants looking to own their own land.

Profundo has been reporting on the palm-oil sector since the 1990s, and has no political or commercial interests in Malaysia. “Felda is one of the big players, and the way the whole thing was organised raised many questions,” said director Jan Willem van Gelder. “We thought it would be good for investors to be aware of those and draw their own conclusions.”

Few media outlets discussed the report. Not The New York Times, in all its coverage. Certainly not the Malaysian dailies, as one editor confirms: “Unless it’s an absolutely glowing assessment, we’re going to have problems getting it through.”

The Financial Times was one of the few exceptions; it comes with rebuttals from Felda CEO Sabri Ahmad, who insists the restructuring was above board and that the descendants of the Felda settlers were never promised the land.

In Malaysia, where old pride and older prejudices are inextricably intertwined with business big or small, there are numerous facets to every story. There are those who view the Felda IPO positively; the narrative of the poor settler made good is potent. But there is also dissatisfaction, as evinced by the thousands of orange-clad settlers who took to the streets this past weekend in protest.

Profundo’s report contains the sort of information that is widely known, but seldom reported. It is cud for late-night ruminations at tea stalls and around mahjong tables, punctuated by sighs and shrugs. And in an environment where any contrarian opinion is dismissed as opposition rumour-mongering, blinkers are often a more sensible accessory than sunglasses.

Crikey spoke to several bankers and analysts in Malaysia; their story is of a country scrabbling for a yardstick to compare itself to the bourses of Singapore and Hong Kong, with oil-palm related activity doubling as a crutch for the economy. And with government-linked companies making up the bulk of the strategic and cornerstone investors for many large IPOs, there are far too many toes for even the most nimbly worded report to evade.

An investment banker at a Malaysian-based international bank, speaking on condition of anonymity, says analysts and bankers are not averse to a dissenting opinion: they just might not see the point, and there is more to this than simply covering their eyes.“At least with that you have hope of removing the blindfold. This is like stabbing ourselves in the eyes, and still describing deal after deal in full-blown 18-megapixel high-definition intensity,” she said. “But if we tell ourselves the lie enough times, with all these reports that build castles in the sky, I guess we can eventually convince ourselves and the investing community it is true.”

Profundo director van Gelder, one of the report’s co-authors, emphasises the lack of a critical attitude on both sides of the investment community.

“Our main argument centred on the fact that the proceeds of the IPO will flow into the coffers of the ruling party in Malaysia, and this will undermine the political system even more than it already is,” he said. “But this argument is not of much interest to many investors because it does not threaten their own income … the stock brings a short-term profit, and if the issues around palm oil heat up, it can always be sold!”

Van Gelder also points out that the bankers involved the deal are mainly concerned with the short period before and after the IPO, the period in which the banks’ own money is at risk.

“They are not so much concerned about longer-term issues nor where the proceeds of the IPO will go,” he said. “Their objective is to sell as many shares as they can now, to earn their fees and get out of here and get on to another job.”

Despite reservations, Felda’s shares have yet to drop beneath their debut price of RM5.30. The presence of cornerstone investors, which vacuum up most of the shares and commit to a lock-up period of 180 days, contribute to this short-term stability — as do the stock’s low allocations, which meant a lot of squabbling for the relatively few shares available on the open market, temporarily boosting prices. Traders also say the upcoming Malaysian general election skews valuations, making it almost certain that government-linked companies will outperform in the short to medium term.

The long term, however, is another matter. There are serious doubts over Felda’s ageing plantations and the pace of its replanting activities. But it is hard to tell which would be worse — for Felda shares to tank, dragging with them the Malaysian economy and the work of multiple generations of settlers, or for them to soar, justifying a history of bullying and bowdlerisation.

Peter Fray

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