Investment Highlights

• We are downgrading our recommendation on FGV Holdings from HOLD to SELL with a lower fair value of RM1.08/share (vs. RM1.69/share previously). Our new fair value of RM1.08 assumes a price to book of 0.7x, which implies a 30% impairment to FGV’s shareholders’ funds of RM5.6bil.

• We have also lowered FGV’s FY19F net profit growth by 50.8% to account for our earnings revision of MSM Malaysia.

• FGV announced that it would be taking legal action against 14 former employees for losses suffered from failure to discharge fiduciary duties in respect of the acquisition of Asian Plantations Ltd (APL) in FY14. FGV is seeking damages of RM514mil, amongst others. FGV said that it is assessing the financial damage from this litigation.

• There are several issues here. First, we believe that FGV would be recording asset impairments higher than the original RM300mil that was guided. Previously, FGV said that it would not be making impairment for APL. APL has 12,161ha of oil palm estates in Sarawak. Assuming APL is impaired by RM514mil, this coupled with the previous guidance of RM300mil, means that there could be a total impairment of RM814mil, which is 14% of shareholders’ funds.

• Second, in a separate Bursa announcement, FGV said that it has completed forensic investigations on the acquisitions of Troika condominiums, FGV Cambridge Nanosystems and lease of company cars. The forensic investigations on the acquisitions of FGV Green energy and Yapidmas Plantations in Sabah are not completed yet.

• We believe FGV had already recorded impairments for its investment in FGV Cambridge and Troika condominiums in its previous financial statements. However, we are unsure if there would be more impairments to come if FGV decides to take legal action.

• Apart from the above two, FGV is also investigating its internal processes. These include direct award of procurement practices and opening of credit lines to customers.

Source: AmInvest Research - 26 Nov 2018