Investment Highlights

• We maintain SELL on FGV Holdings (FGV) with an unchanged fair value of RM0.70/share. Our fair value of RM0.70/share for FGV implies a P/BV of 0.6x.

• FGV reported a core net loss of RM159.7mil (ex-land lease changes) in 1QFY20 compared with a core net profit of RM1.4mil in 1QFY19. FGV suffered losses in the plantation and sugar units in 1QFY20.

• We are now forecasting that FGV would record a net loss of RM49.6mil vs. a net profit of RM50.3mil originally due to weaker FFB production growth and a larger net loss in the sugar division. Recall that 51%-owned MSM Malaysia recorded a net loss of RM34.7mil in 1QFY20 (1QFY19: RM7.1mil net loss) due to higher interest and depreciation expenses.

• FGV’s plantation division (upstream and downstream) sank into the red in 1QFY20 due to a 32.6% YoY drop in FFB production. Higher CPO price could not compensate for the negative impact of the sharp drop in FFB output in 1QFY20. On a quarterly basis, FGV’s FFB output shrank by 29.0% in 1QFY20.

• The plantation division recorded a pre-tax loss of RM152.1mil in 1QFY20 vs. a pre-tax profit of RM39.8mil in 1QFY19. Average CPO price increased by 34.4% to RM2,669/tonne in 1QFY20 from RM1,986/tonne in 1QFY19.

• Due to the group’s sizeable operations in Sabah, we believe that compared to its peers, FGV was more affected by the lagged impact of the drought and haze, which took place in 3QFY19.

• FGV’s 1QFY20 FFB yield was also affected by lower fertiliser application in FY19. FGV only applied 65% of its full year fertiliser requirements in FY19.

• FGV’s CPO production cost (ex-mill and land lease changes) surged to RM2,177/tonne in 1QFY20 from RM1,375/tonne in 1QFY19. The YoY increase in production cost per tonne in 1QFY20 was due to higher application of fertiliser, a fall in the production volume of CPO and higher cost of wages. In 1QFY19, FGV delayed fertiliser application by two months.

• Pre-tax of the logistics division swung into a profit of RM9.7mil in 1QFY20 from a loss of RM16.8mil in 1QFY19. The YoY turnaround in earnings in 1QFY20 was driven by higher throughput and the absence of impairments. The division recorded a RM25mil provision for its employee separation scheme and a RM16.3mil impairment on overdue balances in 1QFY19.

Source: AmInvest Research - 29 May 2020