Investment Highlights

• We maintain our SELL recommendation on FGV Holdings with a fair value of RM1.08/share. Our fair value of RM1.08/share for FGV is based on a price-to-book ratio of 0.9x. FGV’s book value was RM1.22/share as at end-Dec 2018.

• We have reduced FGV’s FY19F core net profit by 41.3% to account for: (1) a lower average CPO price assumption of RM2,100/tonne vs. RM2,300/tonne previously; and (2) MSM’s weak earnings.

• Recall that MSM recorded a net loss of RM7.1mil in 1QFY19 dragged by lower selling prices and higher depreciation and processing expenses for the new sugar refinery in Tanjung Langsat, Johor.

• FGV reported a net loss of RM3.4mil in 1QFY19. FGV’s core net profit (ex-land lease agreement changes only) was RM1.4mil in 1QFY19 compared with a core net loss of RM11.1mil in 1QFY18. Included in FGV’s financials in 1QFY19 was a net reversal of impairment of RM47.5mil on financial assets.

• FGV’s 1QFY19 core net profit was below our forecast and consensus estimates. FGV was hit by losses in a plantation joint venture in Indonesia, sugar and logistics units. FGV’s share of net loss in joint ventures was RM19.6mil in 1QFY18 vs. a profit of RM0.5mil in 1QFY18.

• The logistics division registered a pre-tax loss of RM16.8mil in 1QFY19 vs. a profit of RM23.8mil in 1QFY18. The logistics unit recorded an RM25mil provision for an employee separation scheme and RM16.3mil impairment on overdue balances. FGV said that without these two items, the logistics unit would have recorded a pre-tax profit of RM24.5mil in 1QFY19 (1QFY18: RM23.8mil).

• The plantation division posted a higher pre-tax profit of RM39.8mil in 1QFY19 vs. RM19.5mil in 1QFY18. This was driven mainly by a reversal of impairment of RM64mil resulting from settlements by customers and improved contribution from the downstream segment. The upstream segment recorded a pre-tax loss of RM57mil in 1QFY19.

• FGV achieved a FFB production growth of 6.6% YoY in 1QFY19. FGV’s average CPO price realised slid by 19.7% to RM1,986/tonne in 1QFY19 from RM2,472/tonne in 1QFY18.

• FGV’s production cost (ex-mill) declined to RM1,379/tonne in 1QFY19 from RM1,728/tonne in 1QFY18. The fall in the production cost per tonne in 1QFY19 was partly due to a two-month delay in fertiliser application.

Source: AmInvest Research - 30 May 2019