Investment Highlights

• We are keeping our SELL recommendation on FGV Holdings (FGV) with a higher fair value of RM1.10/share vs. RM0.85/share previously. We are now assuming a P/BV ratio of 0.9x compared with 0.7x originally as higher CPO prices are expected to result in improved earnings for FGV. FGV’s book value was RM1.23/share as at end-FY18.

• We have raised FGV’s FY20F net profit by 17.0% to account for a higher average CPO price of RM2,300/tonne vs. RM2,200/tonne previously.

• For FY19E however, we have increased FGV’s core net losses to RM120.2mil (pre-tax loss = RM86.3mil) from RM105.7mil to account for MSM Malaysia’s weak performance.

• FGV’s 9MFY19 results were below consensus estimates and our expectations due to impairments of RM304mil in 3QFY19. Out of the RM304mil, RM125mil was in respect of shareholders’ advances to 50%-owned Trurich Resources (which owns plantation land in Indonesia), RM145mil was related to MSM Malaysia and RM34mil was in respect of FGV’s receivables.

• FGV said there would not be any more impairment in 4QFY19. The group is in the process of disposing of Trurich Resources.

• Excluding impairments, FGV’s plantation division (upstream and downstream segments) recorded a smaller pre-tax loss of RM58mil in 9MFY19 vs. RM99mil in 9MFY18. The improved performance was driven by higher sales volume and margins in the downstream segment. Pre-tax profit of the downstream segment was RM102mil in 9MFY19 vs. a loss of RM179mil in 9MFY18.

• The upstream division was in the red in 9MFY19 due to weaker palm product prices. Average CPO price plummeted by 22.3% to RM1,447/tonne in 9MFY19 from RM1,863/tonne in 9MFY19. On a positive note, FFB production rose by 12.4% YoY in 9MFY19.

• FGV’s ex-mill production cost was RM1,447/tonne in 9MFY19 against RM1,863/tonne in 9MFY18. FGV had only applied 45% of its full-year fertiliser requirements as at end-September 2019. The group aims to apply 65% of its full-year fertiliser requirements by end-FY19E.

• The logistics division recorded a smaller pre-tax profit of RM21.6mil in 9MFY19 compared with RM25.0mil in 9MFY18 due to impairments of RM44mil. Excluding the impairments, the division recorded a higher pre-tax profit in 9MFY19 due to higher throughput.

Source: AmInvest Research - 29 Nov 2019