Investment Highlights

• We recommend to sell FGV Holdings with an unchanged fair value of RM1.26/share. Our fair value for FGV is based on a P/BV of 1.1x.
   
• There is no difference between FELDA’s take-over price and FGV’s current share price of RM1.30/share. In addition, we believe that there are downside risks as CPO prices are softening.
   
• Also although FGV’s net profit is expected to improve in FY21F partly on the back of smaller losses from MSM Malaysia, FGV’s PE is demanding at 31.9x.
   
• We have raised FGV’s FY20E net profit to RM122.8mil from RM26.8mil previously to account for a strong 4QFY20. We believe that FGV’s plantation division would perform well in 4QFY20 on the back of higher palm product prices.
   
• We view the possible termination of the land lease agreement (LLA) between Felda and FGV positively if the compensation amount is fair and reasonable.
   
• Although FGV’s palm oil landbank would drop by almost 80% to about 77,875ha, the termination of the LLA would improve FGV’s cash flows. FGV would not have to pay between RM250mil and RM300mil for the lease of the land and replanting expense of more than RM200mil (depending on the size of the replanted areas) every year.
   
• We have assumed that FGV’s FFB production would improve by 7.7% in FY21F after a 6.5% decline in FY20E. FGV’s FY20E FFB yields were adversely affected by the lagged impact of the drought and haze, which took place in 3Q2019.
   
• We expect smaller losses at FGV’s sugar unit in FY21F. MSM’s net losses are anticipated to narrow to RM21.5mil in FY21F from RM70.6mil in FY20E. We think that industry demand for refined sugar will improve in FY21F, leading to a higher utilisation rate at the sugar refinery in Tanjung Langsat. As such, the sugar refinery may achieve an average utilisation rate of 40% to 50% in FY21F vs. 30% to 40% in FY20E.

Source: AmInvest Research - 26 Jan 2021