Investment Highlights

• We are keeping our SELL recommendation on FGV Holdings with a lower fair value of RM0.85/share (vs. RM1.08/share originally). Our new fair value for FGV is based on a price-to-book ratio of 0.7x compared with 0.9x previously.

• This implies that FGV may impair its assets by about 30%. We think that if 51%-owned MSM Malaysia is classified as asset available for sale, the bulk of the potential impairment may be in respect of MSM. FGV’s book value was RM1.22/share as at end-Dec 2018.

• We are now forecasting that FGV would record a core net loss of RM105.7mil in FY19E vs. a profit of RM16.4mil previously. FGV is expected to be hit by weak CPO prices and larger losses in MSM in FY19E. We forecast MSM’s net loss to widen to RM120mil in FY19E from RM19mil originally.

• FGV swung into the red in 2QFY19 due to losses in the plantation and sugar units. FGV’s core net loss was RM54.5mil in 2QFY19 (inclusive of a reversal of impairment of RM18.3mil on financial assets) in contrast to the core net profit of RM1.4mil in 1QFY19 (inclusive of the reversal of impairment of RM47.5mil on financial assets).

• Excluding land lease agreement (LLA) changes, we estimate FGV’s core net loss to be RM53.1mil in 1HFY19 compared with a core net loss of RM95.7mil in 1HFY18. Without the reversal of impairment of RM65.9mil on financial assets, we believe that FGV’s losses would have been significantly larger in 1HFY19.

• On the pre-tax level, FGV’s plantation division sank into a loss of RM54.1mil in 2QFY19 from a profit of RM39.8mil in 1QFY19. We believe that this was due to a higher cost of production and lower earnings in the downstream segment. We reckon that FGV applied more fertiliser in 2QFY19 as the group delayed two months of fertiliser application in 1QFY19.

• Average CPO price realised edged down by 1.6% to RM1,955/tonne in 2QFY19 from RM1,986/tonne in 1QFY19. Although FFB production improved by 8.8% QoQ in 2QFY19, CPO sales volume dropped by 12.8%.

• Comparing 1HFY19 against 1HFY18, FGV’s FFB production improved by 11.1%. Average CPO price realised slid to RM1,972/tonne in 1HFY19 from RM2,447/tonne in 1HFY18.

• On a positive note, the logistics division clawed back to a pre-tax profit of RM43.1mil in 2QFY19 from a pre-tax loss of RM16.8mil in 1QFY19 in the absence of provisions. The unit was affected by an RM25mil provision for an employee separation scheme and RM16.3mil impairment on overdue balances in 1QFY19.

Source: AmInvest Research - 29 Aug 2019