4. RISK FACTORS 4. RISK FACTORS NOTWITHSTANDING THE PROSPECTS OF OUR GROUP AS OUTLINED IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS (WHICH MAY NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON OUR FUTURE PERFORMANCE, IN ADDITION TO ALL OTHER RELEVANT INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS, BEFORE MAKING AN APPLICATION FOR OUR IPO SHARES. 4.1 RISKS RELATING TO OUR BUSINESS AND OUR OPERATIONS 4.1.1 We depend on the availability of high quality germinated seeds We use only high quality germinated seeds procured from established seed producers in order to achieve high FFB yields. Our FFB yield is higher than the average yield recorded in Johor for FYE 2012 to FYE 2015 and in Malaysia for FYE 2012 to FYE 2016. Further details on the average FFB yield recorded in Johor and Malaysia for FYE 2012 to FYE 2016 and the factors contributing to our superior yield are set out in Section 6.2.2 of this Prospectus. As we do not possess seed production capabilities, we depend solely on external suppliers for such high quality germinated seeds. We currently procure high quality germinated seeds from Felda Agricultural Services Sdn Bhd, a well-established seed producer. We prefer the “Felda Yangambi” germinated seeds as it has higher FFB yield and oil extraction rate. Prior to 2011, we used other types of germinated seeds, namely Chemara, Dunlop, SEU Supra germinated seeds sold by various seed producers. Subsequent to 2011, we used the “Felda Yangambi” germinated seeds as it has higher FFB yield and oil extraction rate. Higher FFB yield is preferred as we are able to harvest a higher tonnage of FFB per hectare while a higher oil extraction rate is preferred as the oil mills may extract a higher proportion of palm oil from the FFB. A comparison of the FFB yield between the “Felda Yangambi” germinated seeds and other seeds currently available are set out below: FFB yield Types of seeds (Mtjhectare)
Felda Yangambi 24.62 I\lIFOR 24.24 La Me 24.44 AVROS 24.73
(Source: Malaysian Palm Oil Council) We may face a risk of a supply shortage of the “Felda Yangambi” germinated seeds in the event of a reduced seed production by Felda Agricultural Services Sdn Bhd due to adverse weather, fire or other natural disasters. We believe that our operations and financial results will not be materially affected if we utilise other types of germinated seeds, as there are no inherent risks associated to using other types of germinated seeds as evidenced by our usage of different types of seeds in our plantation for prior years. In addition, there are no risks in changing from other types of germinated seeds to that of “Felda Yangambi” and vice versa. Since 2011, we had not experienced any supply shortage of the “Felda Yangambi” germinated seeds.
4. RISK FACTORS (Cont’d) 4.1.2 Expiry of lease for the Larkin Investment Property MHB owns an investment property comprising three (3) units of detached buildings at Kawasan Perindustrian Larkin (also known as Dato’ Onn Industrial Estate), Johor Bahru. The said property is leased to multiple tenants for rental income. The investment property is erected on a leasehold land measuring 1.295 hectares with a 60 year lease term expiring on 24 September 2031. As such, the remaining lease period for the land is approximately 15 years. MHB had on 8 April 2012 made an application to Johor Bahru Land Administrator to seek an extension of the leasehold land tenure for 60 years. However, the application was rejected vide its letter dated 19 December 2013. On 10 February 2015, the Company had appealed to the Johor Bahru Land Administrator’s decision. In response, Johor Bahru Land Administrator had vide its letter dated 14 July 2015 stated the following: (i) the said land shall be developed for housing purposes; and
(ii) in connection thereto, all applications for lease extension are on hold.
The rental income derived from the said investment property is as follows:FYE 2013 FYE 2014 FYE 2015 FYE 2016 RM RM RMRM Rental income 1,068,549 998,353 860,957 868,998 EBITDA 4,310,747 4,456,672 4,432,828 4,270,167 PAT 1,899,650 2,044,318 1,804,008 1,594,080 Rental income as a 24.79% 22.40% 19.42% 20.35% percentage of EBITDA Rental income as a 56.25% 48.84% 47.72% 54.51% percentage of PAT For the FYE 2013 to FYE 2016, the rental income derived from this investment property as a percentage of our EBITDA is between 19.42% to 24.79% while· the rental income as a percentage of our PAT is between 47.72% to 56.25%. At the end of the lease, MHB will no longer be able to derive any rental income from the said investment property and this is expected to negatively affect our EBITDA and PAT. Currently, all the tenants are on short term lease. In addition, at the end of the lease, MHB is required to surrender the land to the Johor State Authority. The fair value of the investment property is derecognised when either they are permanently withdrawn from use or when they have been disposed of or no future economic benefit is expected from the rental income as indicated above upon the expiry of the lease term. Nonetheless, MHB is not required to derecognise the fair value of the investment property should the lease be extended, if any, in the future. The future market value has to be determined by an independent registered valuer. 4. RISK FACTORS (Cont’d) In 2031, when the land is surrendered to the Johor State Authority, there will be an immediate loss of rental income. In anticipation of this, our Group plans to mitigate the potential loss of rental income by increasing our FFB sales volume and FFB yield by implementing our future plans as follows: (i) As at the LPD, 419.3 hectares or 38.7% of our oil palms are replanted with “Felda Yamgambi” germinated seeds, of which 185.3 hectares or 17.1% have matured and are harvestable. Our management intends to use “Felda Yangambi” germinated seeds for all future replanting exercise as it has higher FFB yield and oil extraction rate. Our management believes our future FFB yield will further improve as more plantation area replanted with the “Felda Yangambi” germinated seeds matures and are harvestable. (ii) Our Group plans to improve our fertilising rotation with the purchase of 1,200 Mt of inorganic fertiliser to be applied in our plantation four (4) times a year, as well as 700 Mt of organic fertiliser to be applied two (2) times a year. Our Group seeks to increase the amount of high grade fertilisers to ensure that our estate is optimally fertilised with high quality fertilisers. Using high quality fertilisers can also result in larger fruit sizes which will increase our FFB sales volume and FFB yield; and (iii) Our Group targets to increase our operational efficiency through improvement of infrastructure and equipment of our plantation to have cost savings and improvement in FFB yield. The improvement of infrastructure will ensure smoother field operations and collection of FFB, improvement in water flow and accessibility throughout the Matang Estate. Our Company expects that the improvement in our FFB sales volume and FFB yield will be achievable in the next five (5) years after our replanted oil palms reaches its harvestable age of five (5) years and above. In addition to the above, the total mature and old plantation area as at FYE 2016 is 848.1 hectares, which represents only 78.4% of its total plantation area. The plantation area that was replanted in FYE 2012 (178.3 hectares) will mature in 2017. As such, the total mature and old plantation area will increase to 1,010.0 hectares (net of area undergoing replanting of 16.4 hectares) in 2017 (93% of total plantation). Resulting from the expected increase in total mature and old plantation area to 1,010.0 hectares in 2017, our total FFB production and sales volume of FFB for future financial years are expected to improve when our oil palms reach their mature age and thus increasing the harvestable area. This will contribute positively to the revenue of IVIHB. Nevertheless, there is no assurance that the potential loss of rental income can be successfully mitigated as there is no assurance that our FFB sales volume and FFB yield may be improved.
4. RISK FACTORS (Cont’d) 4.1.3 Dependency on major customer For FYE 2016, 100% of our revenue is derived from sales of FFB to Lenga. The palm oil mill of Lenga is located approximately 38 kilometres from Matang Estate. As all revenue during 2016 is derived from sales to one (1) customer, our Board is of the opinion that we are dependent on Lenga for our revenue. The length of relationship between Lenga and our Group is ten (10) years and Lenga first become a major customer of our Company in FYE 2006. Notwithstanding this, Lenga may reduce or stop buying from us if Lenga’s palm oil mill is affected by production disruptions resulting from machinery breakdown, fire or labour issues. In such event, we will sell our FFB to other customers. The factors that we take into consideration when selling our FFB are set out in Section 6.9. Our dependency on Lenga is mitigated by the following: (i) FFB is a commodity with no product differentiation. As such, in the event that Lenga is unable or unwilling to purchase the FFB harvested from our Group’s plantations for whatsoever reasons, we may sell it to other palm oil mills located nearby. Irawi Holdings Sdn Bhd (“Irawi”) (previously the major customer of MHB for FYE 2012 and FYE 2013) is approximately 100 kilometres from Matang Estate. However, in the event that MHB sells its FFB to Irawi additional transportation costs will be incurred at the expense of IVIHB. Nevertheless, the increase in transportation cost is not expected to materially affect the GP margin of the Matang Group. Nothing has come to the attention of the Board to believe that Irawi will not buy from the Company in the event that Lenga no longer buys from the Company. In addition to Irawi, Matang has the flexibility to sell its FFB to a number of customers. For the past financial years, in addition to Lenga and Irawi, Matang has sold FFB to Kilang Kelapa Sawit Bukit Pasir Sdn Bhd as well as Mewah Mega Enterprise. (ii) In view that FFB is a commodity, its selling price is determined by market forces, ie supply and demand. As such, in the event that MHB sells its FFB to other palm oil mills, there will not be any material difference in the selling price and as such, IVIHB’s revenue will not be materially affected. (iii) MHB has been selling to Lenga for the past financial years since FYE 2006 and has fostered a good working relationship with Lenga. Nothing has come to the attention of our Board to suggest that Lenga will not continue buying from MHB. Subsequent to FYE 2016, we began selling our FFB to Milik Mestika Sdn Bhd (“Milik Mestika”) which operates Kilang Kelapa Sawit Ledang Mas (“Kilang Ledang Mas”), a palm oil mill located approximately eight (8) kilometres from Matang Estate. The sales volume of FFB for September 2016 and October 2016 are as follows: September 2016 October 2016 Mt 0/0 Mt 0/0 Lenga 826.83 65.4 427.29 33.2 Milik Mestika 436.79 34.6 858.39 66.8
Total 1,263.62 100.0 1,285.68 100.0 4. RISK FACTORS (Cont’d) Kilang Ledang Mas started operations on 1 August 2016. In view of the close distance between Matang Estate and Kilang Ledang Mas, the Board of MHB has decided to sell our harvested FFB to Milik Mestika. The sale of FFB to Milik Mestika will reduce our dependency on Lenga in addition to providing an opportunity to bring down our transportation costs. 4.1.4 We rely on the continued employment and performance of our key personnel The experiences, abilities and efforts of our existing Directors and key management team contribute to the continued success of our Group’s business. Having a strong key management team is vital to maintain our Group’s operations and maintaining our FFB yield. Our Executive Deputy Chairman, Datuk Kiat Swee Sung, has over 36 years of experience in oil palm plantation operations. Our Executive Director, Eng Cheng Guan, has 29 years of experience in oil palm plantation operations. Our Plantation Director, Ganasan AIL Perumal, has been involved in our plantation operations since 1984, and is well-versed in the daily field operations and office management. Our Estate Manager, Woon Yoon Pa, has over 42 years of experience in oil palm plantation operations. Our Group strives to minimise this risk by ensuring that it has the ability to retain the eXisting Directors and key management. Our Group recognises the importance of attracting and retaining the key personnel and have a human resource plan that include suitable remuneration packages, career development, training and development for all levels of staff besides plans for incentive schemes that serve to attract, motivate and retain key personnel. Although our Group seeks to limit and minimise this risk, though, there can be no assurance that the above measures will always be successful in retaining our Directors and key personnel or in ensuring a smooth transition or management succession plan should such key persons no longer be able to serve our Group. 4.1.5 We may be adversely affected if we fail to obtain or renew licences for our plantation operations Our Group requires the following licences for our plantation operations: Name of Licence!Permit Purpose Issuer Renewal (i) Estate licence To sell and move MPOB Annual FFB
(ii) Nursery licence To produce, sell, Ministry of Plantation Annual move and store oil Industries and Commodities, palm seedlings Malaysia and IViPOB
Additional details on our licences are set out in Section 5.6 of this Prospectus. There is no assurance that in the future, the relevant authorities will issue or renew any required licences in a timely manner or at all. Our licences and permits may not be issuedl renewed in the event that the conditions imposed are not met. Failure to renew, maintain or obtain the required licences and permits may interrupt our Group’s operations and may have a material adverse effect on the operations and financial performance of our Group. For the past three (3) financial years, there were no instances whereby the Company’s licences were not approved for renewal. 4. RISK FACTORS (Cont’d) 4.1.6 Adequacy of insurance coverage Our Group maintains insurance coverage to protect against various losses and liabilities for selected and important properties, equipment and employees. However, the insurance coverage may not be adequate to cover all losses or liabilities that might be incurred in our Group’s operations. For example, we do not have insurance coverage to protect against losses at our oil palm plantation estate as a result of fire or natural disasters. Our Group believes that this is in line with standard industry practices. In addition, our Group will be subject to risk that in the future it may not be able to maintain or obtain insurance of the type and amount at commercially reasonable rates, or at all. If our Group were to incur a significant liability for which our business is not fully insured, it could have a material adverse effect on the operations and financial performance of our Group. A portion of our plantation estate is along a river and is low-lying. As such, this area is prone to occasional flooding. Nevertheless, this has not materially affected our operations as the occasional flooding subsides in a short span of time. For the past three (3) financial years, save for the occasional flooding of lOW-lying areas, our Group had not experience any occurrences of fire, natural disasters or burglary. 4.1.7 Competition risk Our Group operates in the palm oil industry that is highly competitive and comprises large integrated oil palm plantation players as well as small to medium sized local companies. Operating in Johor, we consider our immediate competitors to be FFB producers that operate in the same state, owing to the nature of FFB which requires processing within 48 hours after harvesting. According to the IMR Report, Johor has the third largest oil palm planted area in Malaysia after Sabah and Sarawak. In 2014, there were 647 oil palm estates in Johor that were operated by various large integrated plantation companies and other small to medium sized local plantation companies. Some of the notable plantation companies operating in the oil palm plantation segment in Johor include but is not limited to Felda Global Ventures Holdings Berhad, Sime Darby Berhad, IOI Corporation Berhad, Kuala Lumpur Kepong Berhad, United Plantations Berhad, Kulim (Malaysia) Berhad, Genting Plantations Berhad, Boustead Holdings Berhad, United Malacca Berhad, Felcra Berhad and Tradewinds Plantation Berhad. Given the highly competitive environment, there can be no assurance that our Group will continue to be able to compete successfully with other industry players and new entrants in the future. Notwithstanding the competitive environment, we have successfully sold all FFBs harvested from IVlatang Estate to our customers for the past three (3) financial years. For FYE 2016, our FFBs were entirely sold to Lenga, which has been one of our major customers for the past ten (10) years. Subsequent to FYE 2016, we began selling our FFB to Milik Mestika which operates Kilang Ledang Mas, a palm oil mill located approximately eight (8) kilometres from Matang Estate. Kilang Ledang Mas started operations on 1 August 2016. In view of the close distance between Matang Estate and Kilang Ledang Mas, the Board of MHB has decided to sell our harvested FFB to Milik Mestika. The sale of FFB to Milik Mestika will reduce our dependency on Lenga in addition to prOViding an opportunity to bring down our transportation costs. 4. RISK FACTORS (Cont’d) Our Group’s future success will depend upon our ability to amongst others, maintain or increase our FFB yield, to maintain or lower our production costs and adapt to future policy and regulatory environment in Malaysia. Notwithstanding that, our Group will be actively planning and implementing our future plans to increase our revenue, there can be no assurance that changes in the competitive environment will not have any material adverse effect in our financial performance. We believe that our competitive strengths such as competent management capabilities, superior FFB yield, young age profile of our plantations and application of the best agronomy practices, can help to provide us with the edge to maintain or expand our market position and market share. Further details on our competitive strengths are set out in Section 6.2 of this Prospectus. 4.1.8 Our cost of fertilisers may be adversely affected by exchange rate fluctuation The cost of fertilisers constitutes a substantial portion of our Group’s purchases. For FYE 2016, the cost of fertilisers made up to 89.7% of our Group’s total purchases. Although the fertilisers used in our plantation operation were sourced from our local suppliers and transacted in RM, our local suppliers may import selected ingredients that are not available locally. Therefore, the cost of fertilisers provided by our local suppliers is affected by, exchange rate fluctuation. The main ingredients are imported by our local suppliers from People’s Republic of China, Peru, Canada and USA. As the import of these ingredients are generally denominated in USD, a depreciation of the RM against USD may increase our fertilisers cost and adversely affect our financial performance. A weakened RM against the USD may increase our fertilisers cost particularly the cost of ingredients that are imported by our local suppliers, thus adversely affect our financial performance. Nonetheless, our Group has not experienced any material adverse impact arising from the cost of fertilisers in relation to the fluctuations of the foreign exchange rates during the financial periods under review. In addition, it is our practice to request for quotations from various local suppliers before our purchase. Notwithstanding the above, there can be no assurance that the fluctuation in prices of fertilisers in relation to exchange rate fluctuation will not materially adversely affect the financial performance of our Group in the future.
4.2 RISKS RELATING TO OUR INDUSTRY 4.2.1 Volatility of CPO prices For the FYE 2016, our revenue is contributed solely from the sale of FFB. Our financial performance is dependent on the prices at which we can sell FFB. FFB prices are positively correlated with CPO prices. FFB prices typically go up when CPO prices go up and vice versa. CPO is a commodity product which is subject to price fluctuations based on supply and demand conditions in relation to the level of global consumption of edible oils, availability and pricing of substitute products, as well as the FFB production. Further details on the supply and demand conditions are set out in Section 4.6 of Section 7 of this Prospectus. The prices of CPO are influenced by a high degree of volatility and cyclicality and vary on a daily basis and as such, the earnings from our oil palm plantation business are subject to market vagaries. The prices of CPO are also susceptible to fluctuations in the USD/RM exchange rate given that the trade and exports of Malaysia’s CPO are undertaken in USD. Any significant and prolonged reduction in the prices of CPO and FFB is expected to adversely affect our financial performance. 4. RISK FACTORS (Cont’d) The average prices for CPO are set out below: Year 2009 2010 2011 2012 2013 2014 2015 2016-2017f CPO(1) 2,237 2,701 3,219 2,764 2,371 2,383 2,153 2,200-2,900 (RM/Mt) Notes: (1) Prices of local delivered CPO f denotes forecast
Moving forward, Protege Associates estimates that CPO and FFB prices are expected to value at an average of between RM2,200 to RM2,900 per Mt and between RM480 to RM600 per Mt respectively for the period of 2016 and 2017, along with an anticipation for fluctuations in the short term, as demand and supply conditions of the CPO remain unstable. (Source: IfVlR Report) There is no assurance that the volatility of CPO prices will not affect the financial performance of our Group.
4.2.2 Dependency on the availability of an adequate labour force The palm oil industry is labour intensive in nature. It requires extensive labour force to plant, harvest and maintain the planted areas to achieve optimal yields. The palm oil industry in Malaysia has been facing difficulty in recruiting Malaysian workers and has resorted to employing foreign workers to cope with any shortfall in the recruitment of IVlalaysian workers. Our Group employs a reasonably large number of foreign workers for our oil palm plantation operations. As at the LPD, we have a labour force of 81 employees of whom 47 or 58.0% are foreign workers. We adhere strictly to a policy of employing only legal workers. All our foreign workers have obtained valid working visa permits from the Ministry of Home Affairs of Malaysia. The local palm oil industry has faced a shortage of foreign labour in recent years. Sourcing Indonesian labour to work in palm oil plantations is preferred in Malaysia as there is no language barrier between the locals and Indonesian labourers. It is also the general sentiment that the Indonesian workers are more likely to have had previous experience in palm oil estates, and would work more efficiently compared to other foreign workers. In recent years, more foreign plantation workers particularly fruit harvesters and collectors from Indonesia, have opted to head home given the improving oil palm sector in Indonesia, and the number of Indonesians willing to leave their homes and families is dWindling due to higher wages at home and rapid urbanisation in Indonesia. Robust economic growth in Indonesia has boosted consumer confidence and opened up more jobs outside the agriculture industry and narrowed the salary gap between Malaysia and Indonesia. This led to a reducing willingness among Indonesians to work abroad. (Source: IMR Report) As at the LPD, all of our foreign workers are from Indonesia, and the booming palm oil industry and rapid urbanisation in Indonesia has made it more difficult for us to source foreign labour from there. 4. RISK FACTORS (Cont’d) In order to attract and retain employees, our Group provides competitive incentives, benefits, welfare schemes and facilities for our employees, including lodging located within the estate being provided for the plantation workers and office staff, and medical coverage for the staff, among others. The mechanisation of some field operations such as the use of tractors in spraying fertilisers and pesticides have, to some extent, insulated our Group’s oil palm plantation operations from disruptions arising from labour shortages. Although our Group believes that continuous improvements in our plantation operations can, to a certain extent, reduce our dependency on foreign workers, no assurance can be given that our Group will not face any labour shortage in the future. Furthermore, changes in immigration and labour policies by the Malaysian Government in respect of foreign workers may affect the availability of labour force for our oil palm plantation operations and in turn, may affect the performance of our Group. In addition, the levy for foreign workers in Peninsular Malaysia has increased from RM590 to RM640 per year for each worker, effective 18 March 2016. As at the LPD, we have 47 foreign employees. The implementation of new levy will incur an additional labour cost of RM2,350 per year, which is not expected to materially affect our profitability. The recruitment of foreign workers is outsourced to third-party agents. Our operations may be adversely affected if these third-party agents are unable to supply us with foreign workers for any reason whatsoever. In the last three (3) years, we have not faced major shortage of foreign workers that disrupt our oil palm plantation operations. 4.2.3 Dependency on weather conditions The climatic condition is a critical factor in oil palm cultivation that would impact the FFB yield. Production can be adversely affected if rainfall does not meet the water demand for the growth of oil palm trees, for example during EI Nino-induced drought where dry conditions last from 8 to 16 weeks. Prolonged dry conditions may result in low soil moisture for the growth of oil palm trees and adversely affect the FFB production. Conversely, excessive rainfall conditions such as the monsoons, or the La Nina phenomenon that follow after drier weather brought by EI Nino phenomenon, may also disrupt the harvesting and logistics within the plantations segment. Prolonged exposure to excessive water levels may result in moisture stress in oil palms; affecting the grading of palm oil and eventually forcing the plantation player to sell the palm oil at discount. (Source: IrvlR Report) Although it is impossible to regulate rainfall patterns, our plantation management team takes practical steps to mitigate the effects of adverse weather conditions as follows: (i) to mitigate the effects of excessive drought, we plant legume cover crops and carry out empty fruit bunch mulching to retain soil moisture in our plantation; and
(ii) A portion of our plantation estate is along a river and is low-lying. As such, this area is prone to occasional flooding. Nevertheless, this has not materially affected our operations as the occasional flooding subsides in a short span of time. To mitigate the effects of excessive rainfall, we constructed silt pits and trenches to improve water drainage and prevent flooding.
Notwithstanding the above, there is no assurance that adverse weather conditions will not have any material adverse effect on the production of FFB which in turn, may affect the plantation operations and financial performance of our Group. 4. RISK FACTORS (Cont’d) 4.2.4 Risk pertaining to pests and diseases attack Oil palm plantations are susceptible to pest and diseases and that could impact the amount of harvestable FFB to a significant extent. Common pests that infest oil palm plantations include rats, bagworms, nettle caterpillars, rhinoceros beetles, bunch moths and termites. In addition, oil palm crops are also affected by common soil borne fungus, such as Ganoderma, one of the more prominent diseases affecting oil palm trees. The outbreak of pests and diseases may result in the destruction of oil palm trees and a decrease in FFB production. The ultimate result is not only loss of crop and lower profitability but also higher expenditure incurred in order to control such outbreaks. In mitigating the risk of pests and diseases attack, our Group takes measures to control the population of pests in our estate primarily by close monitoring and regular pesticide spraying operations. We have also installed owl boxes throughout our estate, to minimise crop losses to rats by introducing their natural predator, the barn owl, to the plantation. For the past three (3) financial years, our Group has not encountered any pests or diseases attack which result in a material adverse effect on the results of operations and financial performance of our Group. 4.2.5 Cyclical variation and seasonal factors resulting in variations in FFB yields Oil palms are perennial crops that are subject to physiological stress on a cyclical basis. Although crops are produced by oil palms throughout the year, there are seasonal variations. In addition, production varies with the condition and age of oil palms as well as the local environment and weather conditions. There is normally a cyclical pattern in the annual FFB yield with higher yields experienced at certain intervals. As a result of a period of production stress, an exceptionally high yielding year will likely be followed by lower yielding years. Our FFB production for the past financial years is as follows: FYE 2013 FYE 2014 FYE 2015 FYE 2016 Total sales volume of FFB (Mt) 17,452 18,135 17,415 14,731 FFB yield (FFB (Mt) /mature 24.97 24.97 24.66 17.37 and old area) From FYE 2013 to FYE 2014, our total sales volume of FFB has been increasing. However, in FYE 2015, the total sales volume decreased due to the replanting exercise of 20.0 hectares carried out during 2015 which resulted in the decrease in the total harvestable area (consisting of both mature and old area) from 726.3 hectares to 706.3 hectares. In FYE 2016, our total sales volume of FFB decreased due to the EI Nino phenomenon, which negatively impacted FFB yield. The decrease in FFB yield was also due to the reclassification of 158.2 hectares of Matang Estate from immature area to mature area. The oil palms in the said area are five (5) years of age and its FFB harvested is generally not as high as the volume of FFB harvested from oil palms aged between seven (7) years to 18 years, being the peak production years. The FFB yield is calculated based on volume of FFB over total mature and old area. As a result of the reclassification, the total mature and old area increased from 706.3 hectares to 848.1 hectares. In relation thereto, the FFB yield for FYE 2016 had decreased as the FFB yield computed is based on lower FFB volume (primarily due to the EI Nino phenomenon) over an increased total mature and old area of 848.1 hectares. 4. RISK FACTORS (Cont’d) Our Group mitigates this risk by periodically reviewing the maturity profile of oil palms at our plantation and seeks to have a balanced maturity profile as well as using high quality germinated seeds. For the FYE 2014, 3.0% or 32.8 hectares of our plantation area are over 21 years old, and 1.9% or 20.0 hectares of our plantation area has been replanted. For the FYE 2016, we underwent a replanting exercise of 16.4 hectares or 1.5% of our plantation. We shall continue with our replanting exercise and target to replant 16.4 hectares during 2017. In addition to the above, the total mature and old plantation area as at FYE 2016 is 848.1 hectares, which represents only 78.4% of its total plantation area. The plantation area that was replanted in FYE 2012 (178.3 hectares) will mature in 2017. As such, the total mature and old plantation area will increase to 1,010.0 hectares (net of area undergoing replanting of 16.4 hectares) in 2017 (93% of total plantation). As such, the replanting exercise in 2016 and 2017 is not expected to negatively impact our FFB yield. Additional information of our replanting exercise is set out in Section 6.3.1 of this Prospectus. 4.2.6 Palm oil faces competition from other substitute oils Palm oil faces competition from other substitute oils such as soybean and rapeseed oils. Any significant change in consumers’ preference towards the substitutes for palm oils and fats will affect the demand and prices of palm oil products which in turn, may affect the financial performance of our Group. Notwithstanding the continued support from the Malaysian Government for the palm oil industry which includes research, development and marketing promotions undertaken by MPOB, there can be no assurance that the palm oil industry will be able to maintain or expand its eXisting market share in the future amidst the competition from other substitute oils. 4.2.7 Palm oil faces negative publicity In the past, certain non-governmental and environmental organisations throughout Europe and USA alleged that palm oil is detrimental to health and that oil palm plantation activities adversely affect the environment, including destroying the habitat of endangered wildlife. This has resulted in palm oil being surrounded by negative publicity. Notwithstanding the efforts undertaken by industry players, associations and the Malaysian Government to challenge the aforesaid allegations, no assurance can be given that prolonged efforts to undermine palm oil and its related products will not have a material adverse effect on the palm oil industry. 4.2.8 Political, economic and regulatory risks External factors beyond the control of our Group may also have adverse effects on our operations and financial performance. These include, but are not limited to changes in the political, economic and regulatory conditions in Malaysia and other countries where palm oil products are exported to. Oil palm plantation business is sensitive to changes in labour laws, interest rates, taxation, tariffs and duties. Besides that, the bilateral relationships between Malaysia and its major palm oil products trading partners such as China, India, the European Union and the USA also play an important factor in CPO demand. 4. RISK FACTORS (Cont’d) Our Group has not in the past experienced any severe restrictions on our conduct of business and will take steps to comply with any new laws and regulations imposed. However, there is no assurance that any adverse development or changes in the political, economic or regulatory environment will not have a significant effect on our Group’s business operations and financial performance. Our DDWG confirms that our Group has complied with all Malaysian government policies and regulations pertaining to the palm oil industry that are applicable to Matang.
4.3 RISKS RELATING TO THE INVESTMENT IN OUR SHARES 4.3.1 No prior market for our Shares Prior to our Listing, there was no public trading for our Shares. Accordingly, there can be no assurance that an active market for our Shares will develop upon our Listing or, if developed, that such market will be sustained. Our IPO Price was determined after taking into consideration a number of factors including but not limited to our pro forma consolidated NA per share, our historical FFB yield, our competitive strengths and our prospects and future plans. There can be no assurance that our IPO Price will correspond to the price at which our Shares will be traded on the ACE Market of Bursa Securities upon or subsequent to our Listing or that an active market for our Shares will develop and continue upon or subsequent to our Listing. The price at which our Shares will trade on the ACE Market of Bursa Securities may be influenced by a number of factors including, amongst others, the depth and liquidity of the market for our Shares, investors’ individual perceptions of our Group, market and economic conditions. 4.3.2 Failure/delay in or abortion of our Listing Our Listing is exposed to the risk that it may be aborted or delayed. Upon the occurrence of such events, investors will not receive any Shares and we will return in full without interest, all monies paid in respect of any application for our Shares within fourteen (14) days, failing which the provisions of sub-sections 243(2) and 243(6) of the CMSA will apply accordingly and we will repay the monies with interest at the rate of 10.0% per annum or such other rate as may be prescribed by the SC upon expiration of that period until full refund is made. In the event our Listing is aborted and/or terminated, and our Shares have been allotted to the shareholders, a return of monies to all holders of our Shares could only be achieved by way of cancellation of share capital as provided under the Act and its related rules. Such cancellation reqUires the sanction of our shareholders by special resolution in a general meeting, consent of our creditors (unless dispensation with such consent has been granted by the High Court of Malaya) and the confirmation of the High Court of Malaya. There can be no assurance that such monies can be recovered within a short period of time or at all in such circumstances. 4. RISK FACTORS (Cont’d) 4.3.3 Future dividend payment policy Our Company, an investment holding company, derives its income mainly from dividends received from our subsidiaries. Hence, our ability to pay future dividends and our ability to sustain our dividend policy in the future are largely dependent on the performance of our subsidiary companies. In determining the size of any dividend recommendation, we will also take into consideration a number of factors, including but not limited to our financial performance, cash flow requirements, debt servicing and financing commitments, availability of distributable reserves and tax-exempt profits/tax credits, future expansion plans, loan covenants and compliance with regulatory requirements. 4.3.4 Performance of our Shares’ trading price and trading volume The trading prices and volume of our Shares could be subject to fluctuations in response to various factors, some of which are not within our control and may be unrelated or disproportionate to our operating results. These factors may include variations in the results of our operations, changes in analysts’ recommendations or projections, changes in general market conditions and broad market fluctuations. In addition, the performance of Bursa Securities is very much dependent on external factors such as the performance of the regional and world bourses and the inflow or outflow of foreign funds. Sentiments are also largely driven by internal factors such as economic and political conditions of the country as well as the growth potential of the various sectors of the economy. These factors invariably contribute to the volatility of trading volumes witnessed on Bursa Securities, thus adding risks to the market price of our listed shares. l\Jevertheless, the profitability of our Group is not dependent on the performance of Bursa Securities as the business activities of our Group have no direct correlation with the performance of securities listed on Bursa Securities. [ The rest of this page is intentionally left blank] 4. RISK FACTORS (Cont’d)
4.4 OTHER RISKS 4.4.1 Continued involvement by our Promoters Our Promoters will collectively hold 11.22% of our enlarged issued and paid-up share capital upon Listing. Collectively, our Promoters shall be our single largest shareholder and shall hold significant voting rights in certain matters requiring the vote of our shareholders unless they abstain from voting voluntarily or as required by law and/or the relevant authorities. As a step towards good corporate governance, we have appointed four (4) Independent NonExecutive Directors and set up an Audit Committee to ensure that, inter-alia, all future transactions involving related parties are entered into at arm’s length basis, on normal commercial terms which are not more favourable to the related parties than those generally available to the public and are not to the detriment of our minority shareholders. 4.4.2 Forward-looking/prospective statements Certain statements in this Prospectus are based on historical data which may not be reflective of future results and others are forward-looking in nature that are based on assumptions and subject to uncertainties and contingencies which mayor may not be achievable. Whether such statements would ultimately prove to be accurate depends upon a variety of factors that may affect our businesses and operations, and such forward-looking statements also involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, plans, performances and achievements, expressed or implied, by such prospective statements. Although we believe that the expectations reflected in such future statements are reasonable at this time, there can be no assurance that such prospective statements or expectations will prove to be correct in the future. Any deviation from the expectations may have a material adverse effect on our business and financial performance. The above is not an exhaustive list of challenges we are currently facing or that may develop in the future. Additional risks whether known or unknown, may in the future have a material adverse effect on us and/or our Shares. [ The rest of this page is intentionally left blank]