5. RISK FACTORS 5. RISK FACTORS Before investing in our Shares, you should pay particular attention to the fact that we, and to a large extent, our operations are subject to the legal, regulatory and business environment in the countries in which we operate. Our business is subject to a number of factors, many of which are outside our control. Before making an investment decision, you should carefully consider, along with the other matters in this Prospectus, the risks and investment considerations set out below. The risks and investment considerations set out below are not an exhaustive list of the challenges that we currently face or may develop in the future. These and other risks, whether known or unknown, may have a material adverse effect on us or our Shares. 5.1 RISKS RELATING TO OUR INDUSTRY 5.1.1 Inherent business risks in the plantation industry may affect our business We are sUbject to risks inherent to the plantation industry. These include, but are not limited to, outbreaks of diseases, damage from pests, fire or other natural disasters, unscheduled interruptions in palm oil milling and rubber tapping operations, adverse climate conditions, downturns in the global, regional and national economies, the entry of new players into the market, changes in law and tax regulations affecting palm oil and rubber, increases in labour and other production costs, and changes in business and credit conditions. Our ability to mitigate these risks depends on various factors, including our ability to keep abreast of the latest technologies related to planting materials, disease prevention and plantation operations, and other developments in the industry, as well as our ability to effectively implement business strategies. For example, while we plan to accelerate our replanting programme in 2012 to reduce the number of lower-yielding oil palms on the plantation estates on the FELDA-Leased and Managed Land, various risks in the plantation industry may cause us not to achieve the indicative replanting schedule, which would require more extensive replanting than we have undertaken in the past. There can be no assurance that we will be able to successfully mitigate the various risks of the plantation industry, or that we will be successful in implementing our strategies, including an accelerated replanting schedule. If we are unable to do so, our business, financial position, results of operations and prospects would be materially and adversely affected. 5.1.2 Local and international commodity prices fluctuate based primarily on local and international market conditions, and will affect the prices of FFB, CPO and other palm oil-based products Movements in CPO-prices influence the prices of FFB and palm oil-based products. As with the price of other commodities, CPO prices are characterised by a high degree of volatility and cyclicality. Since 2007, CPO prices published by the MPOB have been as high as RM3,811.0 per MT (local delivered) in February 2011 and as low as RM1 ,520.5 per MT (local delivered) in November 2008. Local and international prices for CPO and palm oil-based products are affected by a number of factors, including the following: (i) the price of crude oil, which impacts the prices of biofuels, which in turn impact the price of CPO;
(ii) the supply and demand levels for CPO and palm oil-based products and those for substitute oils, particularly soy oil;
5. RISK FACTORS (Cont’d) (iii) global production levels and physical stocks of CPO and other vegetable oils, which tend to be affected principally by global weather conditions and the area of land under cultivation, which in turn is affected by competition with other plantation companies and non-traditional players to procure suitable plantation land; (iv) global consumption levels of CPO and other vegetable oils;
(v) developments in the Malaysian, Indonesian, regional and global economic and political situations;
(vi) foreign exchange rates;
(vii) import and export duties and other taxes; and (viii) government regulations. A significant and prolonged reduction in the prices for FFB, CPO and palm oil-based products would have a material adverse effect on our results of operations and cash flows. 5.1.3 We face competition from other producers of palm oil and substitute oils The palm oil industry is highly competitive and includes a large number of producers globally. Many of the palm oil producers are from Malaysia and Indonesia, which are the largest producing nations of palm oil and refined palm oil-based products. In 2010, Malaysia produced 17 million MT of palm oil, or 37% of global production, and Indonesia produced 22 million MT, or 48% of global production. As a result, our primary competitors are other Malaysian, as well as Indonesian, palm oil producers. Palm oil-based products are commodities, and the primary competitive factor in the palm oil industry is price. In recent years, Indonesian producers of palm oil-based products have become major competitors to Malaysian producers for a variety of reasons affecting the relative competitiveness of the palm oil-based products of the two countries in international markets, including the following: (i) the production costs, including labour and other operating costs, are lower in Indonesia than in Malaysia;
(ii) Indonesia imposes a favourable export duty structure on CPO, allowing CPO to be traded in the domestic market through a bidding process at a minimum price based on the market price net of export duty, which results in Indonesian refiners having a cost advantage in their domestic CPO purchases, refining margins and costs related to the production of refined palm oil-based products. While we are not directly affected by the Indonesian export duty structure on CPO, the downstream operations of our 49%-owned associate FHB and joint venture Felda IFFCO face higher operational costs under the less favourable Malaysian export duty structure; and
(iii) Indonesia has more land available for oil palm plantations than Malaysia. Based on the current regulatory environment in Malaysia, these factors affecting price and margins have a significant impact on competition and would negatively impact our ability to compete effectively against Indonesian producers. 5. RISK FACTORS (Cont’d) The palm oil industry also faces competition from other edible oils, such as soy oil, canola oil and sunflower oil, which are substitutes for palm oil. The United States, Europe, China, India, Brazil and Argentina are all large producers of edible oils. A decline in the price of these other edible oils may cause consumers to increase their use of these other edible oils in place of palm oil, which in turn could have a material adverse effect on our business, financial condition and results of operations. Further, the prices for some substitute oils, including soy, canola and sunflower oils, are subsidised by various United States and European programmes. These subsidies may protect producers of competing vegetable oils from price competition and negatively impact our ability to compete successfully against these products. 5.1.4 We may be adversely affected by duties that Malaysia places on exports of CPO F Marketing, a subsidiary of FHB, acts as our agent for export sales of our CPO. In 2012, we expect to export CPO only to the extent of F Marketing’s Malaysian export duty exempt quota, which is assigned by the Government on an annual basis, and we intend to apply for our own export duty exempt quota for 2013. However, there can be no assurance that the Government will continue to provide F Marketing with or grant us an export duty exempt quota. If any of these events occur, our exports may be adversely affected and our business, financial condition and results of operations may be adversely affected.
5.1.5 Our sales may be adversely affected by weather conditions, natural disasters and other factors that affect the production and supply of FFB The following factors, most of which are outside our control, may affect the production and supply of FFB: (i) local and global weather patterns;
(ii) more stringent environmental and conservation regulations;
(iii) natural disasters; and (iv) diseases or crop pests. The production and supply of FFB were adversely affected by the La Nina weather pattern during 2007 and the EI Nino weather pattern from June 2009 to April 2010. We expect that similar weather conditions will recur in the future. A disruption or reduction in the production and supply of FFB may adversely affect our sales, margins and results of operations. In addition, we do not maintain insurance against losses at our oil palm and rubber plantations as a result of fire or natural disasters. Thus, our results of operations and financial position could be materially and adversely affected by the occurrence of uninsured losses.
5.1.6 Current and future consumer trends and preferences may reduce the demand for vegetable oils, including for CPO and other palm oil-based products Demand for CPO and other palm oil-based products has, in the past, and may, in the future, be affected by campaigns brought by environmental groups, such as Greenpeace International and the World Wide Fund for Nature (formerly, the World Wildlife Fund). These environmental groups have raised concerns that oil palm plantations result in the destruction of large areas of tropical forests and wildlife habitats, and have campaigned to promote sustainable palm oil cultivation and environmentally friendly practices on oil palm plantations. Should changing consumer preferences reduce the demand for CPO and other palm oil-based products, including as a result of environmental concerns, our business, financial condition and results of operations may be materially and adversely affected. 5. RISK FACTORS (Cont’d) 5.1.7 We may be adversely affected by changes in the perception of the climate change costs and benefits connected with palm oil production and the use of biofuels Growth in the palm oil industry is expected to be driven in part by expansion of demand for biofuels as part of an effort to lower global greenhouse gas emissions. However, environmental non-governmental organisations have challenged the sustainability of growth in palm oil production and whether the climate change benefits from biofuels outweigh the perceived environmental costs of increased palm oil production. It is likely that there will be continued pressure for plantations to demonstrate sustainable practices and for processors to demonstrate sustainable sourcing. It is also possible that there may be increasing limitations placed on the operation of the palm oil industry as a result of legislation in producer or customer nations and the internal environmental policies of customer companies. Accordingly, there can be no assurance that restrictions on the expansion of the palm oil industry will not be imposed or that there will be a rise in demand for palm oil as a result of climate change concerns and the demand for biofuels. 5.2 RISKS RELATING TO OUR BUSINESS 5.2.1 Our replanting programme will have a short-and medium-term impact on the amount of FFB produced on the oil palm plantation estates on the FELDA-Leased and Managed Land, which may affect our revenues and margins We are currently undertaking a replanting programme in relation to the oil palm plantation estates on the FELDA-Leased and Managed Land. The total area of the oil palm plantation estates on the FELDA-Leased and Managed Land that has been replanted during the three years from 2009 through 2011 is 36,331 hectares, representing approximately 10.6% of the entire area of these plantation estates. The total area of the oil palm plantation estates on the FELDA-Leased and Managed Land that we have scheduled for replanting in the four years from 2012 through 2015 is 60,292 hectares, representing approximately 17.6% of the entire area of these plantation estates. Replanting is generally a three-year programme, and consists of ground clearing (including the removal of old trees and the processing of the material to enhance the organic balance of the estates), terracing, replanting, planting of ground cover and crop establishment, fertilising and crop management during the three-year replanting period. Depending upon the location and size of the oil palm plantation estate, the topographical conditions and the productivity of the areas, we replant the oil palm plantation estate in stages and not the whole estate at once. The yield of FFB depends on the age and maturity of oil palms, which reach their prime productive period at years 10 through 20 after planting. To ensure continuous, long-term efficient production and sustainable yields, it is customary in the plantation industry to replant plantations approximately every 25 years. However, newly planted oil palms do not yield FFB until they reach harvestable Clge, which is about two and a half years after planting, and the yield of young trees is significantly lower than the yield of mature palms. (The rest of this page has been intentionally left blank) 5. RISK FACTORS (Conf’d) We have carefully planned the replanting programme for implementation on a rolling basis in order to minimise the effect on the FFB production in any given year. However, we expect that our FFB production and, consequently, our revenues from CPO sales will be adversely affected by our replanting programme during the four years from 2012 through 2015, as no FFB will be produced from those replanted plantation estates during the three-year replanting period and until the newly planted oil palms reach harvestable age. Moreover, we anticipate that yields from these plantation estates will continue to be lower than optimal levels until the oil palms reach their prime productive period. Accordingly, large-scale replanting will affect productivity of our plantation operations in the short-and medium-term and, in turn, our FFB production and our revenue. Further details on the replanting programme schedule for the oil palm plantation estates on the FELDA-Leased and Managed Land are disclosed in Section 7.6.6 of this Prospectus. 5.2.2 We rely on foreign workers Like many Malaysian plantation companies, we rely to a significant extent on foreign workers, primarily from Indonesia, for our plantation operations. As at 31 March 2012, we employed a total of 25,558 foreign estate workers, representing approximately 84.4% of our estate workers and approximately 73.1 % of our total workforce. As the standard of living in Malaysia improves over time, we have found it increasingly difficult to hire Malaysian production workers for our plantation operations, and this difficulty may increase in the future. Currently, we obtain at least three-year visa permits for our Indonesian workers, which may be renewed on a yearly basis. We must apply to the Ministry of Home Affairs of Malaysia to issue the necessary work permits, and a similar application is made simultaneously to the Indonesian Embassy in Malaysia. On average, we arrange visas for between 5,000 and 6,000 foreign workers annually. If visa policies in Malaysia or Indonesia were to change in any way so as to make it more difficult for us to maintain a sufficient foreign labour workforce, our business, results of operations and financial condition would be materially and adversely affected. In addition, the expansion of plantation operations in Indonesia has increased competition for Indonesian workers, resulting in increased wages that we must pay to foreign workers and, accordingly, increased operating costs for our plantations. 5.2.3 The FELDA-leased Land is the source of SUbstantially all of our FFB production, and, if we lose the right to use this land, this loss would have a material adverse effect on our FFB production. Compensation provided by FELDA, if any, for any termination of the lease or tenancy in respect of this land may not be sufficient to cover our losses, which may have a material adverse effect on our business, financial condition and results of operations In November 2011 and January 2012, we and FELDA executed agreements in respect of the FELDA-leased Land, whose particulars are set out in Section 11.2 of this Prospectus and which land was previously managed by F Plantations pursuant to a management agreement. Our FFB production is highly dependent on the use of the FELDA-leased Land. Out of the total 347,584 hectares of the FELDA-leased Land under the tenancy agreements entered into between FELDA and FGV Plantations Malaysia dated 6 January 2012 and 21 January 2012, as amended by an addendum on 21 May 2012, a total of 85,073.22 hectares of land are without title, representing approximately 24.5% of the total land under the Land Lease Agreement. With respect to these lands (other than those in Sabah), our due diligence solicitors for the Lands and Licences had, vide their letters dated 6 April 2012 and 28 May 2012, opined that in respect of the lands without titles under the Land Lease Agreement, they have been vested by the state authorities in favour of FELDA to be developed as group settlement areas by virtue of the agreements between FELDA and the state authorities under Section 34 of the Land (Group Settlement Areas) Act. Pursuant to Section 57 of the Land Development Act, FELDA has the right to deal with these lands. 51 I Company No.: 800165-P 5. RISK FACTORS (Cont’d) In respect of the portion of the 103,814 hectares of FELDA-leased Land in Sabah, we have retained separate counsel qualified in Sabah, Messrs Johari & Zelika, who had issued three opinion letters, one dated 31 January 2012 and two dated 3 May 2012. Out of the total 103,814 hectares of the FELDA-leased Land located in Sabah under the tenancy agreements entered into between FELDA and FGV Plantations Malaysia dated 6 January 2012 and 21 January 2012, as amended by an addendum on 21 May 2012, a total of 25,416 hectares of land are without title. In relation to the lands with titles in Sabah under the Land Lease Agreement, Messrs Johari & Zelika opined that FELDA is generally permitted to provide a tenancy in respect of these lands, and that a lease may be created, subject to written permission from the relevant state authority. Messrs Johari & Zelika further opined that FELDA’s ability to create a lease in favour of FGV Plantations Malaysia in respect of the lands without titles may be subject to native customary claims. We cannot confirm whether the lands involve native customary claims. We can only confirm the existence of such native customary claims after the Collector of the District Land Office has exercised its administrative function as provided under Section 13 of the Sabah Land Ordinance. These agreements between FELDA and us permit FELDA to terminate the lease or tenancy in respect of any portion or all of the FELDA-leased Land for any reason after giving notice and paying compensation. Prior to any such termination, FELDA is required to provide us with notice of six months for any portion of the FELDA-leased Land of less than 10,000 hectares, and notice of 18 months for any portion of 10,000 hectares or more. In addition, FELDA is obligated to compensate us based on the calculation of average profit per mature hectare per year for the entire FELDA-leased Land for the latest year in which our audited financial statements are available multiplied by the aggregate size of all of the FELDA-leased Land specified in the notice to terminate multiplied by the loss of our expected future profit. We shall be compensated for the loss of (a) ten years of expected future profits if the termination occurs less than eight years from the date such FELDA-leased Land was most recently rep/anted or (b) five years of expected future profits if termination occurs eight years or more from the date such FELDA-leased Land was most recently replanted. If the lease or tenancy of 10,000 hectares or more is terminated, FELDA is obligated to take over the employment of the relevant plantation staff for a term of no less than the terms on their then outstanding contracts. There can be no assurance that the compensation we receive will be sufficient or that we will be able to acquire or lease plantation land in the future to replace any land that is the subject of a termination of the lease or tenancy; thus, the termination of the lease or tenancy of the FELDA-leased Land may have a material adverse effect on our business, financial condition and results of operations. Furthermore, one of these agreements provides that for 19,854 hectares of the FELDA-leased Land, FELDA may terminate the agreement in respect of any portion or all of that land if FELDA were to lose possession over any portion of this land in favour of any third party. These 19,854 hectares of land have been placed under the tenancy agreement dated 21 January 2012, which provides for instances in the future where FELDA may lose possession over the right to use any part of the 19,854 hectares of the FELDA-leased Land in favour of any third party. Upon the occurrence of such an event, rights over such land will be excluded from the tenancy agreement and the tenancy shall terminate in respect of such land without any compensation to either FELDA or FGV Plantations Malaysia. If FELDA makes such a termination in respect of any portion or all of these 19,854 hectares of land, we will not be entitled to any compensation under the agreements and the loss of our right to use such land may have a material adverse effect on our business, financial condition and results of operations. Further details on this 19,854 hectares of the FELDA-leased Land are disclosed in Section 11.2 of this Prospectus. For a summary of the terms of the Land Lease Agreement and tenancy agreements in relation to the FELDA-leased Land, refer to Sections 7.22.1 and 7.22.2 of this Prospectus, respectively. 52 5. RISK FACTORS (Cont’d) 5.2.4 Our pro forma consolidated statement of financial position, statements of comprehensive income and statement of cash flows included in this Prospectus may not accurately reflect our financial position, results of operations and cash flows. Furthermore, because of the recent, substantial changes in our business model, we do not expect our future financial reports to be comparable to either our historical or pro forma financial reports The pro forma consolidated statements of comprehensive income have been prepared on the basis that the entry into the Land Lease Agreement and related agreements and certain changes in our capitalisation occurred as of 31 December 2008, while the pro forma consolidated statements of cash flows were prepared on the basis that these transactions occurred as of 31 December 2010 and the pro forma consolidated statement of financial position was prepared as if these transactions had occurred as of 31 December 2011. As the pro forma consolidated statement of financial position, statements of comprehensive income and statement of cash flows have been prepared for illustrative purposes only, this information, by its nature, does not give an accurate picture of the effects of the entry into the Land Lease Agreement and related agreements or certain changes in our capitalisation on our financial position had the transactions or events occurred at the date of the statement of financial position, the period of the statement of comprehensive income and the period of the statement of cash flows. Our historical audited financial statements do not reflect any of the events given pro forma effect in the pro forma consolidated statement of financial position, statements of comprehensive income and statement of cash flows, all of which are expected to have a substantial effect on us going forward. Effective 1 March 2012, we and F Palm Industries, a subsidiary of FHB, entered into contractual arrangements that provided for, among other things, our purchase of substantially all of the total CPO that F Palm Industries produces, other than the CPO used by its subsidiary, DOP. We resell this CPO to third-party customers, such as refiners and traders in Malaysia and abroad, to our joint ventures and to FHB’s various subsidiaries and its associate, MEa, for their production of palm oil-based products. As a result of these contractual arrangements, we expect that our sales of CPO will account for a substantial portion of our revenues and that our purchases of CPO from F Palm Industries will account for a substantial portion of our cost of goods sold. Prior to our entering into these contractual arrangements with F Palm Industries, we had no revenues from CPO sales and no cost of goods sold for CPO purchases. In addition, as a result of these contractual arrangements, we will no longer recognise revenues from our sales of FFB, which are made by our subsidiary, FGV Plantations Malaysia, to F Palm Industries. Prior to these contractual arrangements, we recognised revenues from our FFB sales to F Palm Industries. For a summary of the terms of these agreements, refer to Section 7.22 of this Prospectus. The financial information presented in our pro forma and historical consolidated statement of financial position, statements ,of comprehensive income and statement of cash flows reflect our Company’s results prior to our entering into the contractual arrangements with F Palm Industries, and we do not expect them to be comparable to our financial reports in the future. In addition, such financial statements may not be indicative of our future financial position or results of operations. (The rest of this page has been intentionally left blank) 5. RISK FACTORS (Cont’d) 5.2.5 Our financial results for each reporting period are affected by the requirement to estimate the fair value of certain of our assets and liabilities, including the value of the financial liability under our land lease with FELDA and, in the future, the requirement to adjust the carrying cost of our biological assets to their fair value, which may result in volatility to our financial results Under FRS, we are required to estimate at each reporting date the fair value of the financial liability arising under our land lease with FELDA and adjust the carrying value of that liability in our consolidated statement of financial position. We are also required to recognise increases in that liability as other net losses and recognise decreases in that liability as other net gains in our statements of comprehensive income. In estimating the fair value of the financial liability arising under the lease, we are required to make assumptions about various factors such as discount rates, CPO prices, replanting costs and FFB yield. These factors, including those that are beyond our control, such as CPO prices, can be volatile, and their movements can result in material changes in the fair value of the financjal liability under the lease. For additional information on how changes to these factors will affect the fair value of the financial liability under the lease, refer to Section 8.2.4(vii) of this Prospectus and Note 2.2.1 of our pro forma consolidated financial information included in this Prospectus. Furthermore, we currently carry our biological assets, such as oil palms, sugar cane and rubber trees, on our statement of financial position on a historical cost basis, but with the adoption of MFRS 141 “Agriculture”, these assets will be recognised on initial recognition and re-measured subsequently at each reporting date at their fair value after deducting the estimated cost of sales. While we are currently not required to adopt MFRS 141 “Agriculture”, it will be mandatory in Malaysia starting on 1 January 2013. The impact of the adjustment upon initial recognition of the fair value of our biological assets on 1 January 2012 will be accounted for retrospectively by adjusting retained earnings, and subsequent changes in fair value of our biological assets after 1 January 2013 will be recorded as part of our profit or loss in the period in which such fair value changes arise. We expect that the adoption of MFRS 141 “Agriculture” will result in the carrying amount of our biological assets becoming significantly greater than that reflected in the pro forma consolidated statement of financial position and statements of comprehensive income but will not affect the pro forma statement of cash flows. In addition, because we will record as profit or loss the changes in the fair value of our biological assets at the end of each reporting period, our results of operations will be subject to the fluctuations in the market prices of our biological assets following the adoption ofMFRS 141. Further, due to the lack of observable market prices for certain biological assets in their condition at the time of valuation, the fair value cannot always be estimated in a reliable manner. If the fair value of the biological assets cannot be ascertained at the moment of their initial recognition, we intend to estimate the fair value by taking the costs of developing the biological assets and deducting the accumulated depreciation and impairment losses, and to re-value the biological assets when a fair value can be ascertained. If the fair value of the biological assets cannot be ascertained at any other moment, we intend to estimate the fair value of our assets by other means. The requirement to estimate the fair value of certain of our assets and liabilities, including primarily the financial liability under the lease and, upon the adoption of MFRS 141 “Agriculture”, our biological assets could require us to make material adjustments to the carrying amount of our assets and liabilities in future periods. These adjustments could have a material adverse effect on our financial condition or results of operations. In addition, material adjustments to the carrying amount of our assets and liabilities for any reason would cause us to recognise other gains and losses that may result in volatility in our future financial results. 54 I Company No.: 800165-P 5. RISK FACTORS (Cont’d) 5.2.6 We operate internationally and expect to continue to expand our international activities, making us increasingly susceptible to legal, regulatory, political and economic conditions outside Malaysia, as well as operational risks different from those we face in Malaysia We derive a significant portion of our revenues from businesses outside Malaysia. For the years ended 31 December 2009, 2010 and 2011, our international activities contributed RM606.7 million, RM1 ,249.6 million and RM2,241.5 million, respectively, to our total pro forma revenue and accounted for 21.1 %, 21.5% and 30.0%, respectively, of our total pro forma revenue. Our financial condition and results of operations are expected to be increasingly affected by international and local political, economic and operating conditions in countries where we operate, transact business or have interests. Operating in countries outside Malaysia also requires us to comply with foreign laws and regUlations covering many aspects of our operations, including trade laws, investment sanctions laws, laws relating to price controls and government subsidies, environmental laws and antitrust laws. We conduct country risk assessments and in-country risk management to ensure that we understand the legal and regulatory operating environment and the political and economic consequences of operating in a particular country, both when beginning to work in that country and on an ongoing basis. We cannot ensure, however, that local legal, regulatory, political or economic changes in the countries in which we operate will not have a material adverse effect on our business, financial condition or results of operations. In recent years, we have expanded our business through acquisitions and joint ventures outside Malaysia, and we may make similar investments and acquisitions in the future. These transactions subject us to different risks than those we face in growing our operations in lVIalaysia. These risks, which include those related to cross-border acqUisitions, such as foreign legal and regulatory risks associated with such transactions and operational risks related to managing transactions outside Malaysia, may complicate our efforts to complete these transactions and impede our efforts to integrate the overseas businesses into our global operations. Addressing these risks may require us to devote substantial management resources, which could distract our management from overseeing our ongoing operations. Any failure by us to address these issues could delay or prevent us from completing any future overseas expansions or could make such transactions sUbstantially more expensive to complete than we had anticipated, anyone of which could adversely affect our business, financial condition or results of operations. 5.2.7 Changes in the exchange rate between the USD and the RM could have an adverse impact on our results of operations and financial condition A substantial portion of our revenues, including revenues from our CPO and sugar exports and revenues in our downstream business segment, is denominated in USD. For the years ended 31 December 2009,2010 and 2011, RM606.7 million, RM1, 177.9 million and RM2,089.2 million, respectively, of our pro forma revenues were denominated in USD. In addition, certain of our raw materials, such as imported raw sugar, are purchased in USD and certain hedging transactions related to these purchases are also settled in USD. The RM operates on a managed float basis, and an appreciation of the RM against the USD may materially and adversely affect our financial performance because it may reduce our revenues in RM terms and raise the prices for our products against other currencies. To manage this risk, we hedge our exchange rate exposure through specific hedging activities. Nonetheless, changes in the USD to RM exchange rate and insufficiency in our exchange rate hedging could have an adverse impact on our results of operations and financial condition, including as a result of translation adjustments when converting USD amounts to RM for financial statement purposes. 55 I Company No.: 800165-P 5. RISK FACTORS (Cont’d) 5.2.8 Funding, especially on terms acceptable to us, may not be available to meet our future capital needs Our ability to obtain external financing and to make timely repayments of our debt obligations are subject to various uncertainties, including our future results of operations, financial condition and cash flows, the performance of the Malaysian economy and the markets for our products, the cost of financing and the condition of financial markets, and the continuing willingness of banks to provide new loans. We cannot assure you that any required additional financing, either on a short-term or long-term basis, will be made available to us on terms satisfactory to us or at all. If adequate funding is not available when needed, or is available only on unfavourable terms, meeting our capital needs or otherwise taking advantage of business opportunities or responding to competitive pressures may become challenging, which could have a material and adverse effect on our business, financial condition and results of operations. 5.2.9 Our insurance coverage may not be adequate to cover all losses or liabilities that may arise in connection with our operations We maintain insurance at levels that are customary in our industry to protect against various losses and liabilities. However, our insurance may not be adequate to cover all losses or liabilities that might be incurred in our operations. For example, we do not maintain insurance against losses at our oil palm and rubber plantations as a result of fires or natural disasters. Further, we do not insure most of our assets against war, terrorism or sabotage. Moreover, we will be subject to the risk that in the future we may not be able to maintain or obtain insurance of the type and amount desired at reasonable rates. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our business, financial condition and results of operations. 5.2.10 We are exposed to costs arising from compliance with environmental and health and safety regulations and may be exposed to liabilities if we fail to comply with these regulations We are subject to various health and safety and environmental laws and regulations in various countries, inclUding Malaysia, Indonesia, the United States and Canada. These include requirements related to the emission and discharge of hazardous materials into the ground, air or water from our facilities, safety and integrity of our refineries, food quality, solid waste management and emergency planning. As these laws and regUlations become more stringent, they may require us to purchase and install new or additional pollution control equipment or to make operational changes to limit actual or potential impacts on the environment or the health of our employees. Our principal environmental concerns relate to land and forest clearance for plantation development and emission and discharge from our oleochemical, soybean and canola and sugar facilities. Any health and safety or environmental claims or the failure to comply with any present or future regulations could result in the assessment of damages, the imposition of fines, criminal sanctions or the suspension or cessation of our facilities and operations. (The rest of this page has been intentionally left blank) 5. RISK FACTORS (Cont’d) 5.2.11 If we are not able to renew or maintain the approvals, licences, permits and certificates required to operate our business, this may have a material adverse effect on our business We require various approvals, licences, permits and certificates to operate our business and facilities. We may be required to renew these approvals, licences, permits and certificates or to obtain new approvals, licences, permits and certificates. For a more detailed description of our licences, refer to Section 10 of this Prospectus. While we have not experienced any significant difficulty in renewing and maintaining our approvals, licences, permits and certificates, we cannot assure you that in the future the relevant authorities will issue or renew any required approvals, licences, permits or certificates in a timely manner or at all. Failure by us to renew, maintain or obtain the required approvals, licences, permits and certificates may interrupt our operations or delay or prevent the implementation of any capacity expansion or other new projects and may have a material adverse effect on our business, financial condition and results of operations. 5.2.12 Significant or prolonged disruptions to the production, storage and distribution facilities, transportation infrastructure or modes of transportation that we use could have an adverse effect on us Our oleochemical, soybean and canola and sugar businesses are highly dependent on production, storage and distribution facilities and transportation services to ensure smooth operation. The production, storage and distribution facilities, as well as transportation infrastructure and modes of transportation that we use are subject to being partially or completely shut down, temporarily or permanently, as a result of a number of circumstances, such as adverse weather conditions, catastrophic events, environmental remediation, equipment or machinery breakdowns, strikes, lock-outs or other events. Damage to any of these facilities, any significant or prolonged interruption at these facilities or inability to transport products to or from these facilities for any reason would create a bottleneck in the flow of our business operations and impact our ability to serve our customers. If we experience disruptions or interruptions of these types and are unable to quickly identify and resolve them, our reputation, business, financial position and results of operations could be adversely affected. 5.2.13 Activities in our business can be dangerous and can cause injury or death to people or damage to property Our production facilities require individuals to work with equipment, chemicals and other materials that have the potential to cause harm and injury when used without due care. In addition, many of our employees are engaged in hazardous harvesting and transportation activities. In the past, we had instances where employees working in our operations were killed or injured as a result of operating our production equipment, handling various chemicals, raw materials and other items utilised or generated in our business as well as in transportation-related accidents. An accident, injury or death that occurs at our production facilities could result in disruptions to our business, including our production capabilities, and have legal and regulatory consequences, such that we may be required to compensate such individuals or incur other costs and liabilities, any and all of which could adversely affect our reputation, business, financial condition, results of operations and prospects. 5. RISK FACTORS (Cont’d) 5.2.14 We are controlled by FELDA and FAHC, whose interests may not be aligned with those of our other shareholders Upon the successful completion of our IPO, FELDA will own 23% and FAHC will own 17% of our enlarged and issued paid-up share capital and will be our controlling shareholders. FAHC is wholly owned by FELDA. As our controlling shareholders, other than in respect of certain votes regarding matters in which they are interested parties and must abstain from voting under the Bursa Securities LR, FELDA and FAHC will be able to influence the approval of any corporate proposal or transaction requiring a shareholders’ resolution under the Act. This includes the approval of all final dividends and the appointment of directors. There can be no assurance that the interests of FELDA and FAHC will be aligned with those of our other shareholders. 5.2.15 We depend on certain key personnel and skilled employees Our success depends on the continued contributions of our key personnel and skilled employees. Although we intend to focus on succession planning issues to reduce our dependence on such personnel, the experience and knowledge of our key personnel, including our Directors and senior management, may be difficult to replace. If we are unable to retain our existing key personnel, including our Directors and senior management, or skilled employees, or attract, hire and integrate appropriate replacements and successors, our operations may be materially and adversely affected. 5.2.16 Failure to maintain good employee relations may adversely affect our operations and the success of our business Maintaining good employee relations is important for the smooth operation of our production facilities and our business as a whole. As at 31 March 2012, approXimately 40.7% of our total workforce (exclUding estate workers) was unionised under six unions and subject to collective employment agreements. We cannot assure you that we will be able to favourably negotiate the terms and conditions of any new labour agreements, and, accordingly, strikes or disruptions to our operations may occur in the future due to this or other reasons. If we are unable to maintain good employee relations in the future or fail to negotiate collective bargaining agreements in the future on acceptable terms and on a timely basis, or if there are disputes relating to the interpretation or implementation of the collective bargaining agreements, our business, financial condition and results of operations may be adversely affected. 5.2.17 We are substantially dependent on outside sources for the raw materials used in our soybean and canola and sugar businesses Our businesses include plantation, soybean and canola and sugar operations, which are highly competitive industries. Our ability to compete in the plantation, soybean and canola and sugar industries depends upon our ability to control costs and our ability to source raw materials. Our soybean and canola processing operations are not vertically integrated, and we rely on outside sources for substantial portions of our supply of soybeans and canola seeds. The demand for, and prices of, soybeans and canola seeds have increased as a result of the renewable energy and food manufacturing industries that are using these raw materials for other uses, including the production of alternative fuels and lower fat, edible oils. There is no assurance that we will be able to continue to obtain sufficient supplies of soybeans and canola seeds for our soybean and canola operations at competitive prices or at all. I Company No.: 800165-P 5. RISK FACTORS (Cont’d) In addition, our sugar business is highly dependent on imported raw sugar for the operation of our sugar refineries. The production of raw sugar in Malaysia has declined, and, accordingly, substantially all of the raw sugar we use is sourced from outside Malaysia. The volatility of global raw sugar prices is high, and the supply and price of raw sugar are influenced by a number of factors that we may not be able to predict or have any control over, such as adverse weather conditions and changes in agricultural or export policies affecting the exporting country. In recent years, there has been a sharp increase in the price of raw sugar in the international markets. For example, the average price of raw sugar was 27.03 cents per pound in 2010 compared to 13.84 cents per pound in 2008, based on the Sugar No. 11 futures contract traded on the New York Board of Trade. Since the early 1970s, the Government, represented by the MITI, has participated, together with Malaysian refined sugar producers, including MSM and KGFP, in negotiations for long-term raw sugar supply contracts with foreign raw sugar suppliers. These long-term supply contracts have helped us secure a consistent supply of raw sugar at prices that are usually lower than those available otherwise on the international spot market. A substantial portion of our imported raw sugar supply is sourced from these long-term supply contracts, and accordingly, if we do not continue to receive the benefit of these contracts in the future, we may not be able to secure raw sugar on as favourable terms to us. There can be no assurance that these long-term supply contracts will continue to be renewed as they expire, that they will be renewed with pricing or quantity terms that are as favourable as our previous contracts or that the duration of the contacts will be similar to previous contracts. If these contracts are not renegotiated and renewed on a timely basis prior to their scheduled expiry, we will have to purchase virtually all of the raw sugar we use from the international market at prevailing market prices that may be higher than those under our long-term contracts, thereby increasing our exposure to the volatility in market prices of raw sugar and to higher costs of production. Furthermore, if global raw sugar prices decrease in the future to levels below the purchase price under our long-term supply contracts, we would be obligated to purchase a substantial portion of our raw sugar supply at a higher price than that on the international spot market. If any of the foregoing occurs, our profit margins, financial condition and results of operations could be adversely affected. 5.2.18 We may not be able to successfUlly consummate or integrate acquisitions, joint ventures, new projects or new partnerships We have previously expanded our business, including the production and sale of new products, through acquisitions and joint ventures: We may seek to grow our businesses in similar ways in the future, as well as by embarking on greenfield and other new projects or entering into new partnerships. Our existing and future acquisitions, joint ventures, projects or partnerships may require us to make significant cash investments, issue stock or incur substantial debt. In addition, these acquisitions, projects, partnerships or investments may require significant attention from our management, which may stretch our managerial resources and disrupt our existing businesses. Further, any acquisition, joint ventures or projects of businesses or facilities could entail a number of additional risks, including higher costs arising from competition for target assets, increased issues with regUlatory and compliance requirements, problems with effective integration of operations, limited influence or control over the joint venture, failure of our joint venture partners to perform their obligations, as well as the inability to retain key personnel and maintain key pre-acquisition business relationships. Any of these risks could adversely affect our business, financial condition and results of operations. I Company No.: 800165-P 5. RISK FACTORS (Cont’d) 5.2.19 Failure to improve efficiencies in our production in a highly competitive market could adversely affect our profitability Our future success and earnings growth depend in part on our ability to be efficient in the production of our products in highly competitive markets. Improving efficiency at the margin may become more difficult over time. Failure on our part to reduce costs throL1gh productivity gains could adversely affect our profitability and weaken our competitive position. Productivity initiatives that we may implement could involve complex reorganisation of our manufacturing facilities and production lines. Such manufacturing realignment may result in the interruption of production, which may negatively impact our product volume and margins. 5.2.20 The use of derivative instruments, such as forwards, futures and options contracts, may not fully hedge the risks of price fluctuations We may use derivative instruments, such as forwards, futures, non-deliverable forwards, swap and options contracts, or other similar transactions or combination of these transactions, in the ordinary course of our business to hedge the risks of adverse price fluctuations of raw materials, commodities and products, as well as foreign exchange and international rates risks. However, because the commodities and foreign exchange markets are very volatile, we may not be able to fully hedge the future gains or losses with these instruments against the corresponding change in the prices of the underlying commodity or currency. Any severe or wide fluctuation in the prices of these raw materials, commodities, products and currencies could adversely affect our business, financial condition and results of operations if we are unable to manage such fluctuations effectively through these derivative instruments. 5.2.21 Changes in the cost and availability of energy and essential utilities may result in increased operating expenses and reduced results of operations Our production processes are energy intensive and reliant on a constant supply of essential utilities, such as electrical power, water and fuel. Increases in our energy or essential utilities costs may have an adverse effect on our profit margin and results of operations. In addition, any significant or prolonged interruption in the supply of fuel, electrical power, water or other essential utilities may have an adverse impact on us. An increase in fuel prices would also affect our transportation and distribution costs. 5.2.22 We are exposed to the credit and other counterparty risk of our customers in the ordinary course of our business We have various credit terms with virtually all of our wholesale and industrial customers, and our customers have varying degrees of creditworthiness that exposes us to the risk of non-payment or other default under our contracts and other arrangements with them. For more information on the credit risk of our customers and other external parties, refer to Note 5(a) of Section 9-1 and Note 9.24 of Section 9-11 of this Prospectus. In the event that a significant number of material customers default on their payment obligations to us, our business, financial condition and results of operations could be materially and adversely affected. 5. RISK FACTORS (Cont’d) 5.2.23 Global capital and credit market issues could negatively affect our liquidity, increase our costs of borrowing and disrupt the operations of our suppliers and customers Global credit and capital markets have experienced extreme volatility, disruption and decreased liquidity in recent years, making it more difficult for companies to access credit and capital markets. While there have been periods of stability in these markets, the environment has become more volatile and unpredictable. Recently, there has been particular focus on the potential for sovereig n debt defaults and banking failures in Europe. Widespread unease about the strength of the European banking system has resulted in large declines in stock prices and marked widening in credit spreads. Focus has also extended to the United States following Standard & Poor’s downgrade of the long-term credit rating of US Treasury debt from AM to M+. The recent volatility in global financial markets has added to the uncertainty of the global economic outlook and a number of countries are experiencing slowing economic activity. Our direct exposure to the affected European countries and the United States is limited, with the main risk we face being damage to market confidence and access to, and costs of, funding and a slowing down in the activity of our business partners or through other impacts on entities with whom we do business. We depend on stable, liquid and well-functioning capital and credit markets to fund our operations. If market conditions continue to deteriorate due to economic, financial, political or other reasons, our ability to obtain bank financing and access the capital markets may be adversely affected and may be subject to higher costs. Our business could also be negatively impacted if our suppliers or customers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy. Any or all of these developments could have a material adverse effect on our business, financial condition, results of operations and prospects. 5.2.24 Certain tax incentives or exemptions from the Government may no longer be available in the future Some of our operating companies are eligible for certain tax incentives and exemptions granted by the Government, including those relating to the Government’s identification of the palm oil ind ustry as a key component of its Economic Transformation Programme. These tax incentives and exemptions include investment tax allowances and re-investment allowances. For more information on tax incentives and exemptions applicable to us, refer to Sections 8.2.5(xi)(a) and 8.8 of this Prospectus, respectively. For those operating companies to benefit from these tax incentives and exemptions, certain conditions must be satisfied during the period in which these tax incentives are in effect. The conditions imposed under these tax incentives relate to such matters as production levels, capital expenditures and investment amounts. To the extent that these conditions are not met before the respective expiry dates, these tax incentives and exemptions may no longer be available to us. Further, there is no guarantee that the Government will continue to provide the tax incentives and exemptions that currently benefit our business or that we expect to benefit from in connection with future investments in capacity expansions. The loss of any of these tax incentives and exemptions could have a material adverse effect on our business, financial condition and results of operations. 5. RISK FACTORS (Cant’d) 5.2.25 Outbreaks of infectious diseases, including avian flu and H1N1 flu, could adversely affect our financial condition and results of operations Several countries in Asia and Europe have in recent years reported cases of avian flu and H1 N1 flu. An outbreak of infectious diseases in any country where we have facilities or where our customers are based could significantly affect consumer demand for our products, adversely affect our ability to adequately staff our operations and severely disrupt the distribution networks for our products, as well as the general level of economic activity in Malaysia or any country where we have facilities or where our customers are based. Any of these events could have a material adverse effect on our business, financial condition, results of operations and prospects. 5.2.26 The sugar industry in Malaysia is regulated by the Government, and we are affected by related government policies and regulations, including price controls, subsidies and import restrictions As in many countries, the sugar industry in Malaysia is regulated by the Government. Pursuant to the Price Controls Act, 1946 and the Price Control and Anti-Profiteering Act, 2011, the Government has historically set price ceilings for refined white sugar products, taking into account various factors. In recent years, there has been a sharp increase in the price of raw sugar in the international markets. Following such increases in raw sugar prices, the Government introduced a sugar price subsidy in 2009 so that the .increase in the price of raw sugar would not be fully passed onto consumers of refined sugar products in Malaysia. Our performance, like the performance of other sugar producers in Malaysia, thus depends partly on the Government’s policies with respect to the sugar industry, such as the level of SUbsidy, which are beyond our control. There can be no assurance that the Government will not decide to reduce or eliminate its sugar subsidy or narrow its application in the future. For example, if international raw sugar prices remain high or increase further and the Government reduces or eliminates the sugar subsidy without increasing or eliminating the refined sugar price ceilings, our financial condition and results of operations may be materially and adversely affected. The import of refined sugar into Malaysia is restricted by the Government, with such imports only being allowed for industrial consumers with approved permits issued by the Government. There is no assurance as to whether the restriction on the import of refined sugar products into Malaysia will be maintained in whole or in part or as to the extent to which the Government will issue permits for the import of refined sugar. If the Government relaxes its restrictions on the import of refined sugar products or eliminates such restrictions such that importation is freely permitted, we will be required to compete in the domestic market with refined sugar producers based outside Malaysia, which could have a material adverse effect on our market share, profit margins, financial condition, results of operations and prospects. 5.2.27 We may be SUbject to various potential litigation risks associated with our operations We may be subject to various litigation from time to time in respect of the various businesses that we operate. Disputes and legal proceedings in which we may be involved are subject to many uncertainties, and their outcomes are often difficult to predict. The defence of any such claims and any associated settlement costs can be substantial, even with respect to claims that have no merit. In addition, adverse judgments arising from litigation could result in restrictions or limitations on our operations or result in a material adverse impact on our reputation or financial condition. Due to the inherent uncertainty of the litigation and dispute resolution process, there is no assurance that the resolution of any particular legal proceeding or dispute will not have a material adverse effect on our future cash flow, results of operations or financial condition. 62 5. RISK FACTORS (Cont’d) 5.2.28 Risk relating to the Special Share MOF, Inc holds a Special Share in our Company. The Special Share confers the following rights on its holder: (i) the right to appoint three persons at anyone time to be our Chairman, Managing Director/Chief Executive Officer and Director;
(ii) entitlement to receive notice of, attend and speak at all general meetings;
(iii) the right to require our Company to redeem the Special Share at par at any time by serving notice upon our Company and delivering the relevant share certificate; and (iv) priority over any capital repayment before other shareholders in the event of a voluntary winding-up or dissolution of our Company. Prior consent of the Special Share holder is required for: (i) amendments to our Articles with respect to provisions relating to the Special Share and the special rights attached to the Special Share;
(ii) winding-up or dissolution of our Company;
(iii) creation and issuance of additional shares that carry voting rights exceeding 10% of the total voting rights that require the approval of shareholders in a general meeting; (iv) any material disposal of assets within our Group exceeding 20% of our Group’s net tangible assets or 20% of our Group’s average profit for the preceding three financial years; and
(v) any take-over, merger or change in business of our Company that requires approval of our shareholders in a general meeting.
The Special Share does not confer the following rights on its holder: (i) voting rights at general meetings; and
(ii) rights to participate in the capital or profit of our Company.
There can be no assurance that any change in Government policy and/or direction will not have a material adverse impact on our financial condition and results of operations. (The rest of this page has been intentionally left blank) 5. RISK FACTORS (Cont’d) 5.3 RISKS RELATING TO OUR ASSOCIATE, FHB 5.3.1 We rely on contractual arrangements with FHB for various aspects of our plantation product sales, and the disruption of such arrangements with FHB could have a material adverse effect on our or FHB’s business, financial condition, results of operations and prospects Effective 1 March 2012, we and F Palm Industries, a subsidiary of FHB, entered into contractual arrangements that provided for our sale to F Palm Industries of substantially all of the FFB produced on the oil palm plantation estates on the FELDA-Leased and Managed Land, and our purchase from F Palm Industries of sUbstantially all of the total CPO that F Palm Industries produces, other than the CPO used by its subsidiary DOP. We resell this CPO to third-party customers, such as refiners and traders in Malaysia and abroad, to our joint ventures and to FHB’s various subsidiaries and its associate MEa, for their production of palm oil-based products. In the event these contractual arrangements are terminated or F Palm Industries is unable to perform its obligations in whole or in part under these arrangements, we would need to find alternative parties to purchase our FFB and to supply us with CPO. These contractual arrangements with F Palm Industries may be terminated by either F Palm Industries or us for any reason and at any time sUbject to certain procedures. If the termination is in respect of between one and three palm oil mills, the terminating party must give six months’ prior written notice to the other party, and, if the termination is in respect of more than three palm oil mills, the terminating party must give 24 months’ prior written notice to the other party. In the event of any such termination, we would have to build or acquire palm oil mills or rely on third-party palm oil mills. If we build or acquire palm oil mills, there can be no assurance that we could build or acquire these palm oil mills in a timely or cost-efficient manner or that we could obtain the financing or regulatory approval necessary for these projects or acquisitions. If we rely on third-party palm oil mills, we could incur greater costs associated with increased transportation time to these palm oil mills and could experience other logistical delays that could adversely affect the stock and quality of our FFB available for sale. Any termination of our contractual arrangements or F Palm Industries’ inability to perform its obligations in whole or in part under these arrangements could have a material adverse effect on our business, financial condition, results of operations and prospects. ·Pursuant to contractual arrangements between us and F Marketing, a subsidiary of FHB, F Marketing acts as our agent for export sales of our CPO. In 2012, we expect to export CPO only to the extent of F Marketing’s Malaysian export duty exempt quota, which is assigned by the Government on an annual basis, and we intend to apply for our own export duty exempt quota for 2013. However, if F Marketing’s export duty exempt quota is not available for our CPO exports in whole or in part, and we are not granted an export duty exempt quota by the Government, it could have a material adverse effect on our business, financial condition and results of operations. Further to our contractual arrangements with F Palm Industries, we and FHB share in the pricing premium that we obtain from the sales of RSPO-and ISCC-certified products. We and FHB are committed to complying with the principles of the RSPO and the ISCC, which is necessary to be able to obtain the pricing premium, if any, for these products, and adherence to these principles results in more stringent environmental standards for us and FHB. With respect to the RSPO, we and FHB are required to undertake certification of the various supply-chain models that we and FHB use in our business. With respect to the ISCC, we and FHB are required to undertake certification about the areas where our and FHB’s CPO was produced, about savings in greenhouse gas emissions and about our and FHB’s supply-chain models. If we and FHB do not comply with the RSPO principles, we may face difficulty in selling our products to those customers who participate in RSPO or only purchase RSPO-certified products. Likewise, if we and FHB do not comply with the ISCC principles, we may be restricted from providing CPO to renewable energy suppliers that sell to the European I Company No.: 800165-P 5. RISK FACTORS (Cont’d) market under the Renewable Energy Directive. In either case, we and FHB may receive negative publicity. Any or all of these factors could have a material adverse effect on our or FHB’s business, financial condition, results of operations and prospects. 5.3.2 We depend on FHB for various other aspects of our operations, such as the provision of R&D and other services, supply of raw materials and purchase of cup lumps, as well as the use of FHB’s production, storage and distribution facilities and shared management for our businesses In addition to our reliance on the contractual arrangements with F Palm Industries, we depend on our associate FHB for various other aspects of our operations. FHB provides us with R&D and other services, supplies raw materials for our plantations business segment and purchases cup lumps produced on our rubber plantations on the FELDA-Leased and Managed Land, as well as providing us access to its production, storage and distribution facilities. We also share the same chief executive officer and some of the members of senior management with FHB. Our plantations business segment depends on FHB for R&D and other services, supply of raw materials and purchase of cup lumps. We rely on the R&D activities of F Agricultural, a subsidiary of FHB, inclUding R&D on oil palm breeding, tissue culture, agronomy and crop protection. In addition, we obtain from FHB all of our requirements for oil palm seedlings and a substantial portion of our fertiliser, and a subsidiary of FHB acts as the grader of FFB that we sell to F Palm Industries. Further, we sell all of our cup lumps to FHB. Any significant interruption in these arrangements with FHB could have a material adverse effect on our business, financial condition and results of operations. We depend on the uninterrupted operation of FHB’s production, storage and distribution facilities and various modes of transportation from those facilities to deliver our CPO and other products among various facilities and to our customers. FHB’s production, storage and distribution facilities, as well as its transportation infrastructure and modes of transportation that we use are subject to being partially or completely shut down, temporarily or permanently, as a result of a number of circumstances, such as adverse weather conditions, catastrophic events, environmental remediation, equipment or machinery breakdowns, strikes, lock-outs or other events. Any significant or prolonged interruption at these facilities or inability to transport our products to or from these facilities for any reason would create a bottleneck in the flow of our business operations and affect our ability to serve customers. If disruptions or interruptions of these types are not quickly identified and resolved by either us or FHB, our reputation, business, financial position and results of operations could be adversely affected. We share the same chief executive officer and some of the members of senior management with FHB. In addition, several members of our subsidiaries’ senior management also serve in management roles in FHB and its subsidiaries. There can be no assurance that conflicts will not arise or that any agreements governing our relationships with FHB and its subsidiaries will fUlly protect our interests in the future. In addition, we rely on these shared officers and management pursuant to the management services as referred to in Section 13.2.5 of this Prospectus and there can be no assurance that these arrangements between FHB and us will continue in the future or that we will not be required to hire additional members of management if these arrangements were to end. Furthermore, additional or new management for FHB or us may diminish the level of cooperation between us and FHB. 5. RISK FACTORS (Cont’d) 5.3.3 Our share of the results from FHB accounts for a significant portion of our profit before taxation, such that adverse developments affecting FHB could have a material adverse effect on our business, financial condition, results of operations and prospects Our share of results from FHB accounted for RM349.2 million, RM173.1 million and RM227.8 million of our pro forma profit before taxation in 2009, 2010 and 2011, respectively. Accordingly, our profit before taxation is dependent on FHB’s business, results of operations and financial condition. However, we own only 49% of FHB, with the remaining 51 % owned by KPF, and we do not control the approval of major corporate matters requiring a shareholder resolution under the Act. In addition, FHB is subject to numerous risks inherent to the palm oil industry, including those described above in “Risks Relating to Our Industry”, such that any of the various risks affecting the palm oil industry could have a material adverse effect on its business, results of operations or financial condition. Because of our extensive dependence on FHB, these risks could, through their effect on FHB’s business, have a material adverse effect on us. The following include various risks faced by FHB, many of which are outside FHB’s control: • FHB obtains approximately one third of its annual requirements of FFB from the FELDA Settlers, such that any significant interruption in the supply of FFB from the FELDA Settlers could have a material adverse effect on FHB’s production of CPO and, accordingly, on the amount of CPO that we purchase from FHB.
• FHB is subject to various health and safety and environmental laws and regulations in various countries, including Malaysia, Thailand and Pakistan. These include requirements related to the emission and discharge of hazardous materials into the ground, air or water from FHB’s facilities, the safety and integrity of FHB’s mills and refineries, food quality, solid waste management and emergency planning. Any health and safety or environmental claims or any failure to comply with any present or future regulations of these types could result in the assessment of damages, the imposition of fines, criminal sanctions or the suspension or cessation of FHB’s facilities and operations.
• FHB requires various approvals, licences, permits and certificates to operate its business and facilities. Failure by FHB to renew, maintain or obtain the required approvals, licences, permits and certificates may have a material adverse effect on FH B’s business, financial condition and results of operations.
• FHB may be subject to various litigation from time to time in respect of the various businesses that it operates. In the past three years, there have been six civil suits brought against FELDA and F Palm Industries, a subsidiary of FHB, in respect of the determination of the quality and the grading system for the sale of FFB that FHB believes are material, including the suits disclosed in Section 18.6 of this Prospectus. Although FHB believes there are reasonable grounds to defend these claims, there can be no assurance that any such defence will be successful. In addition, any of these suits could result in significant expense to FHB, including costs arising from the defence of such claims and any associated settlement costs, whether or not the litigation is determined in its favour. Due to the inherent uncertainty of the litigation and dispute resolution process, there is no assurance that the resolution of any particular legal proceeding or dispute, including the suits disclosed in Section
18.6 of this Prospectus or that may otherwise arise after the date of this Prospectus, will not have a material adverse effect on FHB’s future cash flow, results of operations or financial condition. 66 5. RISK FACTORS (Cont’d) • Import tariffs and taxes imposed by importing countries can affect the demand for FHB’s palm oil-based products and can encourage substitution of other vegetable oil-based products. For example, if importing countries tax competing substitute products at a lesser tax rate, the price competitiveness of imported palm oil-based products can be adversely affected. In addition, some importing countries impose different taxes on CPO and RBD palm oil to protect and encourage the development of palm oil refineries in their own countries. One of FHB’s major export markets, Pakistan, imposes a tax of PKR8,000 per MT on CPO and a tax of PKR10,800 per MT on RBD palm oil in order to encourage imports of CPO and discourage imports of RBD palm oil. The difference in these import duties is intended to protect and encourage the development of local refineries in Pakistan. However, Pakistan has no fractionation capacity. As a result, the import duties on fractionated products, such as RBD palm olein and RBD palm stearin, are slightly higher at PKR9,050 per MT for both fractionated products as compared to the duty on CPO. The imposition of higher import tariffs on refined palm oil-based products than on CPO may also adversely affect FHB’s exports of RBD palm oil to Pakistan.
• FHB uses various brand names and trademarks, including “Saji”, “Delima”, “Tiara”, “Felda Yangambi” and other intellectual property rights, to prepare, package, advertise, distribute and sell its products. If third parties sell products that use counterfeit versions of its brands or otherwise look like its brands, consumers may confuse its products with products that they consider to be inferior. This could negatively impact its brand image and sales. In addition, FHB has been granted numerous trademark registrations covering its brands and products, and has filed, and expects to continue to file, trademark applications seeking to protect newly developed brands and products. There is no assurance that third parties would not challenge, invalidate or circumvent any existing or future trademarks issued to or licenced by FHB. FHB could incur substantial costs in pursuing claims against, or defending claims from, these third parties or protecting its trademarks, and may have to divert significant efforts of its technical and management personnel. Failure to do so could result in the loss of its rights to develop or make certain products or require it to pay monetary damages or royalties to licence proprietary rights from third parties. Any failure to protect FHB’s proprietary rights could severely harm its competitive position, which could materially and adversely affect its reputation, prospects, business, financial condition and results of operations.
• The Government regulates the retail price of palm olein-based cooking oil and allows producers to claim a subsidy to compensate for their loss of profit. Subject to a quota, cooking oil producers are compensated by the Government for the difference between a certain benchmark RBD palm olein price, which was RM1,700.0 per MT for the year ended 31 December 2011, and a certain market price of RBD palm olein as pUblished by the MPOB. FHB’s financial performance, like the financial performance of other cooking oil producers in Malaysia, thus depends partly on the Government’s policies with respect to the downstream palm oil industry, such as the level of subsidy, which are beyond FHB’s control. There can be no assurance that the Government will not decide to reduce or eliminate its cooking oil subsidy or narrow its application in the future. For example, if the Government reduces or eliminates the cooking oil subsidy, FHB may be sUbject to greater competition and decreased demand, and may have to rely more on its brand name recognition, including its leading position under the “Saji” brand. An elimination or narrowing of the cooking 0;1 subsidy could have a material adverse effect on FHB’s financial condition and results of operations.
67 5. RISK FACTORS (Cant’d) • The market for refined palm oil-based products is highly competitive and prices for refined palm oil-based products are strongly influenced by prices for vegetable oils other than CPO, the primary raw material FHB uses in producing refined palm oil-based products, and by fluctuations in the market price differentials between crude and refined oils. Increases in the price of CPO may not be reflected in increases in the prices of refined palm oil-based products
. because of price competition with competing vegetable oils or other factors. For example, in 2010, the price of CPO increased 20.5% compared to prices in 2009, while the price of refined palm olein in 2010 only increased 16.6% compared to prices in 2009. The utilisation rates of FHB’s refining facilities are affected by the harvest of FFB, the supply of CPO and other factors that FHB expects to continue to affect its utilisation rates. Because of FHB’s relatively high proportion of fixed costs associated with CPO refining, which was approximately 35% of its total refining costs in 2011, any reduction in the utilisation rates for its refining facilities would increase its unit costs. The effects of changing market price differentials between crude and refined oils, together with FHB’s capacity utilisation rates, have led to periods of lower or negative margins in its refining and other downstream operations from time to time. For example, in 2011, based on FHB’s actual realised prices for the sale of refined palm oil-based products, its refining margins were negative for approximately half of the year. FHB expects to experience similar conditions in the future, and, if FHB experiences a period of lower or negative margins, its business, financial condition and results of operations would be materially and adversely affected.
• As consumers in the Western markets that FHB directly and indirectly serve become increasingly health-conscious in their purchasing preferences, they may select edible oils based on considerations other than price and taste. Health professionals and others have encouraged lower daily consumption of oils and fats, in particular trans-fats. For example, there have been efforts, including new regulations and the filing of lawsuits, to require restaurants and packaged food manufacturers to reduce or eliminate the trans-fatty acid content in foods. While palm oil-based margarines and shortenings are produced without trans-fats, FHB and others in the palm oil industry may not be successful in distinguishing palm oil-based margarines and shortenings from products with trans-fats, which could affect the sales of these products and the overall demand for palm oil. Further, producers of other vegetable oils, inclUding those in the United States, have in the past conducted campaigns against palm oil based on nutritional claims. These efforts may reduce consumption of certain oils, such as palm oil, PKO and CNO, based on concerns that they have higher levels of saturated fats and lower levels of polyunsaturated fats than other vegetable oils, such as soy oil. Should changing consumer preferences and eating habits decrease the demand for palm oil-based products, including as a result of health concerns, FHB’s business, financial condition and results of operations may be materially and adversely affected.
(The rest of this page has been intentionally left blank) 5. RISK FACTORS (Cont’d) 5.3.4 Some of the palm oil mills and related assets owned by FHB Group do not currently have CCCs issued to them Some of the lands on which FHB Group’s palm oil mills and related assets (“FHB Related Assets”) are currently located were granted to FELDA pursuant to the Land (Group Settlement Areas) Act (the “Subject Lands”). When the grant was made, the Subject Lands may not have been in the jurisdiction of a municipal councilor there may not have been a municipal council in place. As such, there were no applications made in respect of the CCCs for these FHB Related Assets on the Subject Lands. We were made to understand that as at the Latest Practicable Date, there are six mills and one CPO refinery owned by FHB Group that do not have CCCs issued to them. These mills and CPO refineries are properties, amongst others, which are material to the operations of FHB Group. We were made to understand that FHB Group will be making the application for CCCs to be issued to the CPO refinery. As at the Latest Practicable Date, the applications for CCCs to be issued to the six mills and the CPO refinery have not been made. For further details, refer to Section 11.1 of this Prospectus. In the process of applying for CCCs to be issued for the FHB Related Assets, FHB Group may be requested by the relevant municipal councils to make rectifications to these FHB Related Assets so as to comply with necessary safety requirements. Complying with such requests may require FHB Group to incur significant costs and may lead to temporary disruptions to FHB Group’s operations while rectifications are made. 5.4 RISKS RELATING TO OUR SHARES 5.4.1 There has been no prior market for our Shares and the offering of our Shares may not result in an active liquid market for our Shares There has been no prior market for our Shares, and there is no assurance as to the liquidity of any market that may develop for our Shares, the ability of holders to sell our Shares or the prices at which holders would be able to sell our Shares. None of us, the Promoters, the Selling Shareholder and the Placement Managers have an obligation to make a market for our Shares. Application has been made to Bursa Securities for our listing of, and quotation for, our enlarged and issued paid-up share capital (including the IPO Shares) on the Main Market of Bursa Securities. On 17 May 2012, we obtained the approval of Bursa Securities for our listing of, and quotation for, our enlarged and issued paid-up share capital (including the IPO Shares) on the Main Market of Bursa Securities, and it is expected that there will be an approximate 12-Market Day gap between the closing of the Retail Offering and trading of our Shares. We cannot assure you that there will be no event or occurrence that will have an adverse impact on the securities markets, our industry or us during this period that would adversely affect the market price of our Shares when they begin trading. (The rest of this page has been intentionally left blank) 5. RISK FACTORS (Cont’d) 5.4.2 Our Share price may be volatile The market price of our Shares could be affected by numerous factors, including: (i) general market, political and economic conditions;
(ii) trading liquidity of our Shares;
(iii) differences in our actual financial and operating results and those expected by investors and analysts; (iv) changes in earnings estimates and recommendations by financial analysts;
(v) changes in market valuations of listed shares in general or shares of companies comparable to ours;
(vi) perceived prospects of our business and the Malaysian palm oil market;
(vii) changes in government policy, legislation or regulation; and (viii) general operational and business risks. In addition, many of the risks described elsewhere in this Prospectus could materially and adversely affect the market price of our Shares. Accordingly, there can be no assurance that our Shares will not trade at prices lower than the Institutional Price or the Retail Price. Over the past few years, the Malaysian, regional and global equity markets have experienced significant price and volume volatility that have affected the share prices of many companies. Share prices of many companies have experienced wide fluctuations that are often unrelated to the operating performance of these companies. There is no assurance that the price and trading of our Shares will not be SUbject to fluctuations. 5.4.3 There may be a delay in, or termination of, our Listing The occurrence of certain events, including the following, may cause a delay in, or termination of, our Listing: (i) we are unable to meet the minimum public spread requirement as determined by Bursa Securities, that is, having at least 25% of our issued and paid-up share capital in the hands of at least 1,000 public shareholders holding at least 100 Shares each at the point our Listing; or
(ii) we are not able to obtain the approval of Bursa Securities for our Listing for whatever reason.
In such an event, investors will not receive any IPO Shares, and we will be liable to return in full all monies paid in respect of any application for the IPO Shares. If such monies are not paid within 14 days after we become liable to repay it, then, pursuant to sub-section 243(2) of the CMSA, we will become liable to repay the monies with interest at the rate of 10% per annum or such other rate as may be prescribed by the SC upon expiration of that period until full refund is made. 5. RISK FACTORS (Cant’d) 5.4.4 We may not be able to pay dividends We propose to pay dividends out of cash generated by our operations after setting aside necessary funding for capital expenditures and working capital needs. Dividend payments are not guaranteed, and our Board may decide, in its sole and absolute discretion, at any time and for any reason, not to pay dividends or to pay smaller dividends than we currently propose. If we do not pay dividends, or pay dividends at levels lower than that anticipated by investors, the market price of our Shares may be negatively affected and the value of the investment in our Shares may be reduced. Further, our payment of dividends may adversely affect our ability to fund unexpected capital expenditures as well as our ability to make interest and principal repayments on any borrowings we may have outstanding at the time. As a result, we may be required to borrow additional money or raise capital by issuing equity securities, which may not be on favourable terms or available at all. Further, in the event we incur new borrowings subsequent to our Listing, we may be subject to covenants restricting our ability to pay dividends. 5.4.5 We are a holding company and, as a result, are dependent on dividends from our Subsidiaries and Associates to meet our obligations and to provide funds for payment of dividends on our Shares We are a holding company and conduct SUbstantially all of our operations through our Subsidiaries and Associates. Accordingly, dividends and other distributions received from our Subsidiaries and Associates are our principal source of income. Consequently, the amount of these dividends and distributions are an important factor in our ability to pay dividends on our Shares (to the extent declared by our Board). The ability of our Subsidiaries and Associates to pay dividends or make other distributions to us is subject to the availability of their distributable reserves and their having sufficient funds that are not needed to fund their operations, other obligations or business plans. In addition, changes in applicable accounting standards may affect the ability of our Subsidiaries and Associates, and, consequently, our ability to declare and pay dividends. As we are a shareholder of our Subsidiaries and Associates, our claims as a shareholder will generally rank junior to all claims of our Subsidiaries’ and Associates’ creditors and claimants. In the event of a liquidation of a SUbsidiary or Associate, there may not be sufficient assets for us to recoup our investment in that entity. 5.4.6 We plan to use the proceeds from the Public Issue primarily for expansion of our business, general corporate uses and repayment of our loans, and you may not necessarily agree with how we use them We may spend the proceeds from the Public Issue in ways that you may not agree with or that may not yield a favourable return to our shareholders. Even though at the time of the investment decision, we believed in good faith that the investment would be beneficial to us and maximise returns to our shareholders, the benefits of the investment, for whatever reason, may not be realised as expected. We plan to use the proceeds from the Public Issue primarily for expansion of our business, general corporate uses and repayment of our loans. We will have discretion as to the actual application of our proceeds, detailed further in Section 4.12 of this Prospectus, and you are providing your funds to us, upon whose judgment you must depend for the specific uses we will make of the proceeds from the Public Issue. 5. RISK FACTORS (Cont’d) 5.4.7 The sale, or the possible sale, of a substantial number of our Shares in the public market following our IPO could adversely affect the price of our Shares Following the offering and sale of up to 2,188,890,900 IPO Shares, up to 60% of our Shares will be publicly held by investors participating in our IPO, while 620,185,800 Shares, or 17% of our issued and paid-up share capital, will be held by FAHC and 839,074,800 Shares, or 23% of our issued and paid-up share capital, will be held by FELDA. Following our Listing, the Shares sold in our IPO will be tradable on the Main Market of Bursa Securities without restriction. Our Shares may also be sold in the United States, subject to the restrictions of the US Securities Act, or outside the United States, subject to the restrictions of Regulation S under the US Securities Act. We and FELDA have entered into lock-up arrangements and FAHC and FELDA, as Promoters, are subject to a moratorium in accordance with the SC’s requirements. However, notwithstanding our existing level of cash and cash equivalents, we may issue additional Shares after the end of the lock-up period in connection with financing activities or otherwise, and it is possible that FAHC or FELDA may dispose of some or all of their Shares after the lock-up period or moratorium period, as applicable, pursuant to their own investment objectives. If FAHC or FELDA sell, or are perceived as intending to sell, a substantial amount of our Shares, the market price for our Shares could be adversely affected. 5.4.8 Because the Retail Price and the Institutional Price are higher than our NA value per Share, purchasers of our Shares in our IPO will experience immediate and substantial dilution, and purchasers of our Shares may experience further dilution if we issue additional Shares in the future The Retail Price and the Institutional Price are higher than the NA value per Share. Therefore, purchasers of our Shares in our IPO will experience an immediate dilution in NA value of RM3.05 per Share assuming that the Retail Price is RM4.55 and Institutional Price is RM4.55, and our existing shareholders will experience an increase in the NA value per Share. In order to meet our funding requirements, we may consider offering and issuing additional Shares or equity-linked securities in the future. Purchasers of our Shares may experience further dilution in the NA value per Share if we issue additional Shares or equity-linked securities in the future. 5.4.9 Forward-looking statements in this Prospectus may not be accurate This Prospectus contains forward-looking statements. All statements, other than statements of historical facts, included in this Prospectus, including, without limitation, those regarding our financial position, business strategies, plans and prospects of our management for future operations are forward-looking statements. Such forward-looking statements are made based on assumptions that we believe to be reasonable as at the date of this Prospectus. Forward-looking statements can be identified by the use of forward-looking terminology, such as the words “may”, “will”, “would”, “could”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “aim”, “plan”, “forecast” or similar expressions, and include all statements that are not historical facts. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from any results or performance expressed or implied by such forward-looking statements. I Company No.: 800165-P 5. RISK FACTORS (Cont’d) Such forward-looking statements are based on numerous assumptions regarding our present and future business strategies and the environment in which we will operate in the future. Such factors include, among others, general economic and business conditions, competition, the impact of new laws and regulations affecting our industry and initiatives of the Government. In light of these uncertainties, the inclusion of such forward-looking statements in this Prospectus should not be regarded as a representation or warranty by us or our advisors that such plans and objectives will be achieved. (The rest of this page has been intentionally left blank)