| Far East Holdings Berhad (FAREAST), a Pahang-based oil palm plantation, with approximately 14,800 hectares of planted land, has been rewarding its shareholders who have invested in the company in the last five years.
FAREAST was recently rated seventh by The Edge in their survey on the “Top 100 companies that gave the best returns from 31 Dec 2000 to 31 Dec 2005” published on 15 May 2006. The company achieved a 5-year cumulative return of 338% or a CAGR (compound annual growth rate) of 34.4% annually within this period. And it has achieved another 58% of share price return in 2006 (based on the closing price of RM4.20 on 6 Dec 2006).
Investors who practise value investing would be able to pick stocks like FAREAST. A company with good returns need not necessarily be a “blue chip” company. FAREAST is an example of a smaller sized company that has performed well in Bursa Malaysia. Investing in a good company, or in other words, picking the right stock, followed by continuous monitoring of the company’s fundamentals is a very basic but important strategy. Of course, investors must also have discipline and patience.
With the current market capitalization of approximately RM520 million, FAREAST’s success can largely be attributed to the following factors:
Unique Shareholding Structure
FAREAST was a state-owned plantation company when it was first listed in 1991. Its major shareholders were mainly Pahang state corporations, namely Perbadanan Kemajuan Negeri Pahang (PKNP) and Lembaga Kemajuan Perusahaan Pertanian Pahang (LKPP). In 2002, PKNP sold its 10% stake in FAREAST to a privately held plantation company named Prosper Trading Sdn Bhd, which is now the largest shareholder holding 26.97% of FAREAST’s shares. With this change, FAREAST became a state-linked company but managed by a commercially driven private company.
This unique shareholding structure enables both parties to enter into a partnership to achieve a win-win result. The Pahang State Development Corporation (PKNP) is able to provide opportunities for new land acquisitions, especially in the State of Pahang. Meanwhile, Prosper Trading Sdn Bhd, a subsidiary of Prosper Group of Companies, has been in the oil palm business for more than 20 years and has vast experience in running the business.
From an investor point of view, FAREAST’s share price (adjusted for 1 to 1 bonus issue in November 2005) of approximately RM0.90 to RM1.50 during the year of 2002 would have somewhat attracted value investors’ interest based on the company’s net tangible asset of more than RM5 and low gearing. With Prosper Trading Sdn Bhd as a new entrant, it would have further justified a value buy on this company.
Prudent Management
FAREAST practises prudent management in terms of cost management and the company’s financials. Despite the rising cost of maintaining estates, the management is still able to control their operating cost per tonne of crude palm oil (CPO) at about RM700 for the past 5 years.
In order to maximize earnings and sustain competitiveness, FAREAST practises systematic replanting activities using high yield clones and improved planting techniques, which enable the company to have a good age profile palms. Currently, 87% of FAREAST’s palms are at the prime age while 13% are young palms. Such systematic approach enables the company to maintain a high level of yield per hectare and oil extraction rates, which would normally drop with ongoing replanting.
Commitment of the Major Shareholders
The major shareholders’ strong commitment to the company is evident when Prosper Trading Sdn Bhd managed to push through the settlement of the FAREAST’s receivables (not related to trade) owing by PKNP and Pascorp Holdings Sdn Bhd, a wholly-owned subsidiary of PKNP, to the company totaling RM64.8 million. The debt settlement was finally completed successfully in March 2004 with the payment of cash and land.
This has resulted in a significant improvement in FAREAST’s Balance Sheet. At the end of the debt settlement in 2004, FAREAST’s share price (adjusted for 1-for-1 bonus) was at around RM1.70. The company now sits on a cash pile of RM80 million and is looking for opportunities to further expand its land acquisition and other integrated activities.
To an investor constantly looking for a good value company, the commitment of a company’s major shareholders towards enhancing the company’s value is an important qualitative factor. | 
