Investment Highlights

• Maintain SELL on Felda Global Ventures (FGV) with an unchanged fair value of RM1.45/share, which is based on a P/BV of 0.9x. FGV is currently trading at FY17F PE of 120.5x and FY18F PE of 68.6x.

• We have reduced FGV's FY17F net profit forecast by 44.8%. Although we have increased our average CPO price assumption from RM2,550/tonne to RM2,700/tonne, this has been offset by a lower FFB growth assumption and weaker sugar performance.

• We are now expecting FGV's FFB production to improve by 6.0% in FY17F vs. 15% previously. FGV is anticipating a 10% increase in FFB production in FY17F. FGV's FFB output growth was zero YoY in 1HFY17.

• The poor FFB production growth in 1HFY17 was due to labour shortage and a slow recovery of yields in the younger oil palm trees. We understand that the issue of labour shortage has been partly alleviated with the arrival of 1,200 workers last month. FGV hopes to recruit another 7,000 workers by yearend.

• FGV's 1HFY17 core results were below our expectations and consensus estimates. FGV recorded an estimated core net loss of RM36mil in 2QFY17 vs. a profit of RM0.5mil in 1QFY17. Core net loss was a smaller RM35.5mil in 1HFY17 against RM51.0mil in 1HFY16.

• FGV was hit by impairment on receivables of RM18.2mil, MSM's net loss of RM21.5mil in 2QFY17 and a loss of RM4.3mil in the logistics and others unit. MSM suffered from an increase in the cost of raw sugar imports in 2QFY17.

• FGV recognised a smaller impairment of RM18.2mil in 2QFY17 vs. RM62.3mil in 1QFY17. The RM18.2mil impairment was in respect of a debtor in Malaysia, who is a customer of the plantation business.

• Average realised CPO price rose by 19.2% from RM2,446/tonne in 1HFY16 to RM2,916/tonne in 1HFY17. The increase in CPO price helped compensate for zero FFB production growth n 1HFY17. Production cost (ex-mill) was RM1,691/tonne in 1HFY17 compared with RM1,736/tonne in 1HFY16. On a quarterly basis, FGV recorded a production cost of RM1,649/tonne in 2QFY17 vs. RM1,739/tonne in 1QFY17.

• Pre-tax profit of logistics and others unit swung from a loss of RM6.0mil in 1HFY16 to a profit of RM5.4mil in 1HFY17 on the back of higher throughput and tonnage carried by the logistics sector.

• FGV's net gearing edged down from 73.8% as at end-March to 73.7% as at end-June 2017. Net borrowings (including loans due to significant shareholder) eased from RM4.27bil as at end-March to RM4.23bil as at end-June 2017.

Source: AmInvest Research - 5 Sept 2017