KUALA LUMPUR Shares in Malaysian palm oil firm Felda Global (FGVH.KL) surged 20 percent in their trading debut on Thursday, as investors cheered on the world's second largest IPO after Facebook's <FB.O. rocky initial public offering.
The strong debut beat market expectations of a first day pop of 10 percent and brushed aside, for now, a widely flagged 36 percent drop in Felda Global's first quarter profit to 223.2 million ringgit that had initially unnerved some investors.
Felda raised $3.1 billion in Asia's biggest initial public offering this year - a sharp contrast to Facebook's botched debut and running against the prevailing global gloom in IPO markets.
Within the first 30 minutes of its debut, Felda Global shares were trading as high as 5.46 ringgit, a 0.91 ringgit, or 20 percent, premium to the IPO reference price of 4.55. The local bourse fell 0.1 percent.
"The successful listing of Felda today signifies the endurance of our local stock exchange and proves the IPO market in Malaysia is powerful," said Ahmad Maslan, a government minister in charge of Felda Global's parent -- the Federal Land Development Authority.
A key attraction of Felda is that it gives investors a proxy to the rapidly expanding palm oil sector and represents a bright spot in an Asian IPO pipeline battered by the euro zone debt crisis and concerns over China's slowing growth.
On the downside, the burden of replanting ageing oil palms on the estates it manages - a key reason for its lower profits - may leave Felda Global with less to invest in its expansion plans from Southeast Asia to Africa.
"A lot of people were waiting for it for a long long time," said Linda Koh, a Kuala Lumpur-based analyst with research house InsiderAsia, speaking before the stock began trading.
"The free float for the public portion is quite small. And more importantly, it will get a lot of support from the local institutions. It's a very important company for the government."
The institutional component of the offer was oversubscribed by more than 30 times. Despite strong demand, the IPO was priced slightly below the top of a 4.00-4.65 ringgit range to "leave some money on the table", as one source involved in the deal said.
Felda debuts into a Malaysian stock market that has risen nearly 5 percent this year, outperforming rise of less than 1.5 percent in the MSCI Asia ex-Japan index but lagging some Southeast Asian peers such as Thailand and the Philippines.
Felda's listing plans were initially met with resistance from the farmers who partly owned the firm and feared the loss of control of an asset they had invested in for generations.
The government, a key shareholder in the firm via state-linked funds, sweetened the deal with windfall payment to the farmers, generated from the a fifth of the IPO proceeds, in what is likely to be an election year.
To keep the farmers happy, government-linked funds and the domestic pension fund, which accounted for part of the institutional tranche, made a rush for the stock during the book-building process.
"This Felda IPO is an embarrassment," said an official with a Malaysian bank-backed fund management firm. "About 23 percent of the book was allocated to 'friends and family', all at the expense of legitimate investors with potential synergies."
The official was making reference to global commodities trader Louis Dreyfus, which ended up with a 0.5 percent slice of the IPO as a strategic investor after it was promised a 2.5 percent as part of a refining and marketing alliance with Felda Global.
"It is not an issue for Louis Dreyfus, the alliance was more important than the cornerstone," said an official at Felda Global. "The Felda Global connection gives Louis Dreyfus a foot in Malaysia, it is an alternative and complements the alliance Louis Dreyfus has with Kencana Agri in Indonesia."
Felda Global's appeal has attracted other cornerstone investors - including Qatar Holding LCC, a unit of the Gulf nation's sovereign wealth fund, and Hong Kong's Value Partners (0806.HK) - who are locked into the shares for six months.
CIMB Investment Bank (CIMB.KL), Maybank Investment Bank (MBBM.KL) and Morgan Stanley (MS.N) acted as joint global coordinators for Felda Global's flotation, with JPMorgan (JPM.N) and Deutsche Bank (DBKGn.DE) working as joint bookrunners.
AGEING OIL PALMS
Felda Global plans to use the bulk of its proceeds to snap up more plantations in Southeast Asia and Africa and boost its refining and market business in its bid to become a peer to Archer-Daniel Midlands (ADM.N), Bunge (BG.N) and Cargill by 2020.
But it could stumble with replanting its ageing oil palm trees that account for 53 percent of the 320,000 hectares of oil palm estates it has taken up in a lease from its parent - among the highest in the industry.
Replanting means loss of income for the three years it takes for trees to mature. But if Felda Global Group delays replanting, it's revenue will eventually trickle lower.
In addition, Felda Global's estates, with an annual average productivity of 19.9 tonnes per hectare, rank the third lowest among the major Malaysian plantations firms, after Tradewinds Plantation Bhd TWSP.KL and Boustead Holdings Bhd (BOUS.KL).
"If they aren't able to increase their yield for the past 10 years, how are they able to do it in the next three years," said a palm oil analyst with independent research house in Kuala Lumpur.
(Additional reporting by Elzio Barreto in HONG KONG; Editing by Denny Thomas and Alex Richardson)