The Edge Financial Daily reported that Felda Global Ventures (FGV) is considering to withdraw its Roundable on Sustainable Palm Oil (RSPO) certificates for the 58 palm oil mills within the group in Malaysia effective today. It is also the second big-cap Malaysian plantation company that is being hit by RSPO issue following the suspension of IOI Corp’s RSPO membership. Pending announcement from management on the potential impact, we continue to rate FGV with an Underperform call and TP of RM1.44.

• Related to peat soil. FGV is said to be considering to withdraw its RSPO certificates for 58 palm oil mills within the group effective today. We believe the request for withdrawal of RSPO certificates could relate to peat soil land in Sarawak, which makes up 60% of plantation area. Based on FY15 annual report, it has about 30,668ha in Sarawak.
• Plantation profile. FGV has a landbank of around 431,622ha, which includes 353,260ha under the land lease agreement with Felda. 2/3 of its FFB sourced from Felda smallholders, who own 475,000 ha of land as well as third party purchase, which the remainder comes from its own plantation land.
• Earnings risk surfacing. The withdrawal of RSPO certificates could potentially hit the Group’s earnings as it will not be able to sell its CPO products with a RSPO premium. In addition, its downstream sales could also be affected as its contracts with multi-national companies could face termination risk. On the positive side, its downstream‘s earnings only made up 2.3% of the Group’s bottomline in FY15, which is relatively small.
• Underperform call. Pending the official announcement and guidance from the management, we maintain our underperform call on the company as we see further downside risk due to this negative news.

Source: PublicInvest Research - 3 May 2016