Felda Global Ventures Holdings’ (FGVH) made a loss of RM61m for 1QFY16 after making the adjustment to LLA expenses. The results were below our and market estimates. No dividend was declared for the quarter. Meanwhile, we assume a larger decline for FY16 FFB production, which reduces our earnings forecasts by 20%-30% for FY16-18. Nevertheless, as further downside risk seems limited at current levels, we upgrade our FGV call from underperform to Neutral based on our new TP of RM1.37 (from RM1.44) after rolling over our valuations to FY17.

• 1QFY15 revenue (QoQ: -11.8%, YoY: +38.6%). Compared to 1QFY16, topline grew 38.6% YoY to RM3.7bn. Plantation sales fell 32.5% YoY, hit by a steep decline in FFB production. Average CPO selling price was slightly higher at RM2,303/mt while FFB production fell by 16.1% YoY to 0.78m mt. (1Q FFB production made up 17% of our full-year forecasts). Downstream sales improved by 8.1% YoY, led by higher sales volume in US fatty acid business. Sugar sales rose 9% YoY to RM554m, driven by higher sales volume for domestic and export market. Revenue in trading, marketing and logistics tripled to RM1.5bn owing to contribution from the new business model (trading and tolling), which started since Feb 2015.
• Posting RM61m loss in 1QFY16. Plantation earnings suffered RM100.5m loss on the back of i) weaker FFB production, ii) higher production cost (1QFY16: RM1,824/mt vs RM1,580/mt) and iii) an increase in land lease agreement (LLA) fair value charges. Downstream business made a small profit of RM1.8m, supported by higher margin achieved for palm kernel crushing activities and higher contribution from US fatty acid business. The sugar business fell 27.8% YoY to RM66.5m, attributed to higher raw sugar costs. Trading, marketing and logistics segment rose 11.9% YoY to RM17.8m. Others business made an RM15.1m loss due to weaker margin in fertilizer and rubber business and also an unrealized FX loss amounting to RM14.9m.
• No M&A deals this year. The new management has recently guided that the company is not aiming for any immediate merger and acquisition activities until year-end. It sees an average cost of production of RM1,450/mt this year vs RM1,353/mt last year. It also sees a recovery of 35%-36% in 2Q’s FFB production compared to 1Q given the waning El Nino event. On the full-year, it expects to experience high single-digit drop. Its targets to replant 16,300ha this year. The withdrawal of RSPO certification is expected to reduce its group’s bottomline by RM30m p.a. We revise down our earnings forecasts for FY16-18 by 20%-30% after reducing our FFB production forecasts from flat to -8% for FY16 and inputting a lower growth of 3%-4% for FY17-18. We have also factored in the RSPO’s impact.

Source: PublicInvest Research - 25 May 2016