Investment Highlights

• Maintain HOLD on FGV Holdings with an unchanged fair value of RM1.85/share. Our fair value of RM1.85 is 1.2x of FGV's book value of RM1.54/share.

• FGV's 1HFY18 core results were below our forecast and consensus estimates. We have reduced FGV’s FY18F net profit by 47.2% to account for MSM Malaysia’s earnings revision and poor plantation earnings. We have also revised FGV’s FY18F gross DPS from 7 sen to 1 sen. This is in line with the decline in FGV’s net profit in FY18F.

• FGV’s core net loss (adjusting only for land lease changes) widened from RM35.5mil in 1HFY17 to RM95.7mil in 1HFY18 dragged by the slump in palm product prices, higher selling and distribution expenses and an increase in interest expense. Selling and distribution expenses rose by 20.1% YoY to RM156.2mil in 1HFY18 while interest expense surged by 21.5% YoY to RM95.1mil.

• Although CPO prices fell YoY in 1HFY18, FGV’s cash payments to Felda Group for the lease of plantation land were unchanged at RM155.1mil in 1HFY18.

• FGV recorded a larger core net loss of RM84.8mil in 2QFY18 vs. RM10.9mil as the plantation division swung into a pre-tax loss of RM6.5mil. Although FFB production was flat QoQ in 2QFY18, sales volume of CPO fell by 8.1%. Average CPO price shrank by 2.1% from RM2,472/tonne in 1QFY18 to RM2,419/tonne in 2QFY18.

• FGV recorded an FFB output growth of 7.4% YoY in 1HFY18. The YoY improvement in FFB production in 1HFY18 was driven mainly by a higher number of estate workers and recovery in FFB yield. Recall that FGV was short of 7,000 to 8,000 estate workers in FY17. FFB yield rose from 6.69 tonnes/ha in 1HFY17 to 7.23 tonnes/ha in 1HFY18.

• In January 2018, the board of directors of FGV Holdings appointed forensic investigators to look into six transactions. Out of these, four investigations have been completed and they revealed adverse findings. FGV’s board has also probed six other matters such as the awarding of procurement contracts and the issue of shortage of workers between May 2016 and April 2018, which affected FGV’s bottom line.

• The board of directors is reviewing all findings and has sought legal advice on a possible legal recourse. The board will make further announcements on the next course of action after receiving advice.

Source: AmInvest Research - 29 Aug 2018