- We are upgrading our recommendation on Felda Global Ventures Holdings (FGV) from SELL to HOLD as its share price has fallen below our fair value. Our new fair value of RM2.18/share for FGV implies an FY16F PE of 30x. We have assumed a lower PE of 30x versus 33x previously due to the group’s weak earnings and high proportion of old oil palm trees.

- On an annualised basis, FGV’s 1QFY15 core results appear to be below our forecast and consensus estimates. However, we are keeping our earnings forecast for FGV for now due to the possibility of a turnaround in the performance of the downstream unit in the coming financial quarters.

- The group’s core results swung from a positive RM108mil in 1QFY14 to a negative RM44mil in 1QFY15. On a quarterly basis, FGV’s core net loss declined from RM92mil in 4QFY14 to RM44mil in 1QFY15.

- FGV’s profitability was affected by the downstream and plantation divisions. Downstream unit’s pre-tax losses expanded from RM8mil in 1QFY14 to RM44mil in 1QFY15. On a quarterly basis, the division’s pre-tax losses widened from RM23.9mil in 4QFY14 to RM44mil in 1QFY15.

- The downstream division was dragged by losses in the crushing unit in Canada and oleochemical division in the US. The refining segment in Malaysia was also in the red in 1QFY15. Biodiesel broke-even in 1QFY15.

- Soybean crushing margin in Canada was weak at C$30/tonne in 1QFY15 versus C$45/tonne in 1QFY14. The oleochemical unit in US was affected by increased operating costs resulting from the heavy blizzard in the country.

- We understand that FGV is looking to sell its soybean crushing unit in Canada. The disposal is expected to be announced in 3QFY15. The refining division in Malaysia is expected to turn around in 2QFY15 due to an internal tolling arrangement whereby the sourcing of CPO would be facilitated by a trading unit.

- The plantation division’s pre-tax profit (ex-LLA changes) fell by 74.8% from RM285.2mil in 1QFY14 to RM71.9mil in 1QFY15. Lower CPO price and higher production costs affected the unit’s performance. We also reckon that bigger losses at Asian Plantations Ltd, which was acquired last year, exacerbated the plantation division’s weak performance in 1QFY15.

- Production cost (ex-mill) was RM1,534/tonne in 1QFY15 compared with RM1,424/tonne in 1QFY14 and RM1,432/tonne in 4QFY14. FGV’s FFB production shrank by 20.0% YoY in 1QFY15 due to the floods in the East Coast and lagged impact of the dry weather, which took place in early-FY14. FGV expects its FFB output to remain flat in FY15F.

Source: AmeSecurities Research - 28 May 2015