Investment Highlights

• We recommend a HOLD on FGV Holdings with a higher fair value of RM1.26/share vs. RM1.14/share previously. Our fair value for FGV is based on a P/BV of 1.1x vs. 1.0x previously. We believe that the risk of asset impairments at FGV’s level is lower now as CPO prices have improved.
• FGV’s 9MFY20 core net profit of RM42.6mil (ex-land lease changes (LLA) exceeded our and market expectations of a net loss for the full year. The plantation division swung into the black, with a pre-tax profit of RM133.5mil in 9MFY20 vs. a loss of RM87.3mil in 9MFY19.
• For FY20E, we are now forecasting FGV’s net profit to be RM26.8mil vs. a net loss of RM49.6mil previously. Consensus had estimated FGV’s net loss to be RM16.6mil in FY20E. We have raised FGV’s FY20E net profit to account for a higher-than-expected plantation pre-tax profit margin and improved earnings from the “logistics and others” division. We think that higher land lease payments and weaker FFB output growth would drag FGV’s net profit in 4QFY20 compared with 3QFY20.
• For FY21F, we have revised FGV’s net profit upwards by 3.1% to account for a higher average CPO price of RM2,500/tonne vs. RM2,400/tonne previously.
• Higher palm product prices compensated for a fall in FGV’s FFB production and an increase in the cost of production per tonne in 9MFY20. Average CPO price realised climbed by 28.4% to RM2,536/tonne in 9MFY20 from RM1,975/tonne in 9MFY19. However, FFB production fell by 5.6% YoY in 9MFY20.
• The “logistics and others” division recorded a higher pretax profit of RM37.4mil in 9MFY20 vs. RM21.6mil in 9MFY19 partly due to a reversal in impairment of RM10.6mil. Also recall that in 9MFY19, the unit recorded a provision for its separation scheme of RM20.0mil and impairment loss of RM23.8mil.
• Comparing 3QFY20 against 2QFY20, FGV’s plantation pretax profit rose to RM239.1mil from RM47.1mil. Average CPO price realised improved by 14.6% to RM2,645/tonne in 3QFY20 from RM2,309/tonne in 2QFY20. FFB production grew by 13.2% QoQ in 3QFY20.
• FGV’s cost of CPO production (ex-mill and ex-LLA) climbed to RM1,596/tonne in 9MFY20 from RM1,447/tonne in 9MFY19 due to a lower volume of production and higher fertiliser application. On a quarterly basis, FGV’s cost of production was relatively flat at RM1,423/tonne in 3QFY20.

Source: AmInvest Research - 18 Nov 2020