Investment Highlights

• We are recommending a SELL on FGV as the group’s valuations and share price performance are expected to be affected by ESG concerns. Recall that the US banned FGV’s palm products in FY20 due to allegations of labour abuse. In addition, Felda’s general offer price of RM1.30 would cap any upside to FGV’s share price.

• Our fair value of RM1.29/share (vs. RM1.26/share previously) for FGV is based on an unchanged multiple of 1.1x on the group’s book value of RM1.17/share as at endFY20 instead of FY19.

• FGV’s core net profit of RM9.7mil (ex-land lease changes) in FY20 was below our forecast of RM122.8mil and consensus estimates of RM147.0mil. The discrepancy between FGV’s actual results and our forecast was due to asset impairments of RM181.6mil for Asian Plantation Ltd and a rubber plantation in 4QFY20. In addition, there were commodity losses of RM49.2mil in 4QFY20.

• Also, we believe that FGV’s plantation EBIT was affected by a 22.6% QoQ drop in FFB production in 4QFY20. Hence, FGV did not enjoy the benefits of a higher CPO price as much as the other planters in 4QFY20. FGV’s ex-mill cost of production was RM1,699/tonne in 4QFY20 vs. RM1,423/tonne in 3QFY20.

• FGV has declared a higher gross DPS of 3.0 sen for FY20 compared with 2.0 sen in FY19.

• FGV recorded a core net profit of RM9.7mil in FY20 compared with a core net loss of RM299.3mil in FY19. The earnings turnaround in FY20 was due to higher palm product prices.

• FGV’s plantation division chalked up a pre-tax profit of RM408.3mil in FY20 vs. a pre-tax loss of RM8.8mil in FY19. Average CPO price realised was RM2,675/tonne in FY20 against RM2,021/tonne in FY19. Comparing 4QFY20 against 3QFY20, FGV’s average CPO price realised was RM3,059/tonne in 4QFY20 vs. RM2,645/tonne in 3QFY20.

• On a negative note, FGV’s FFB production slid by 3.6% in FY20. FGV’s cost of CPO production (ex-mill and ex-LLA) increased to RM1,619/tonne in FY20 from RM1,503/tonne in FY19. The rise in cost of production per tonne in FY20 was due to higher fertiliser costs and a fall in the volume of CPO production.

Source: AmInvest Research - 1 Mar 2021