Felda Global Ventures. Heard on the streets

By Cynthia Koons and Duncan Mavin
Young palm oil trees can be about three-feet tall with bunches of leafy palms sticking out on top. It's not easy for them to sneak up on you. Yet at Malaysia's state-run plantation company Felda Global Ventures Holdings Bhd. (5222.KU), the cost of planting trees was partly to blame for a surprising drop of about 50% in first quarter net profit.

The timing of such bad news is disconcerting given Felda's just raised $3.1 billion in the world's second largest initial public offering this year after Facebook Inc.'s (FB) ill-fated share listing. The profit slip marks a sharp contrast from the IPO prospectus, which promoted the group's expertise as the world's third-largest palm oil plantation operator in the world. Underwriters also talked up demand, citing a 4.2% rise this year in global consumption of edible oil and fats--one of palm oil's main uses. That hasn't meant much for Felda so far. First quarter revenue barely budged, rising just 1.8% from last year.

There can be few excuses for such poor foresight. A plantation company should know how much it costs to plant trees. Felda also said it had to pay a higher-than-expected price for crude palm oil. But given that's their business, it's hard to see how they couldn't have anticipated this sooner.

There's another reason to question Felda's growth story. The group's trees are older than competitors' on average, which makes them lower yielding. That explains why they're planting new ones.

Tuesday's profit drop raises questions about Felda's credibility at a critical time too. The company's shares will debut on the Malaysian stock exchange two days from now. They priced near the top of the range the company had been looking for, defying a tough market for IPOs globally, Felda sold its deal thanks to abundant demand from institutional buyers. But they won't hang around if the company keeps delivering unwanted surprises.