- Maintain SELL on Felda Global Ventures (FGV) with a lower fair value of RM1.18/share. Our fair value for FGV is based on an FY16F PE of 20x. FGV’s FY16F earnings could be dragged further by the expensive acquisition of Eagle High Plantations, which is targeted for completion in 2HFY15. In spite of the expensive PE valuation, FGV is currently trading at a low P/BV of 0.7x.

- FGV’s earnings were below consensus estimates and our expectations. We have revised FGV’s FY15F EPS downwards by 15% to account for weaker-than-expected plantation and manufacturing profit margins.

- FGV’s core earnings improved from a loss of RM44mil in 1QFY15 to a profit of RM16mil in 2QFY15. After a weak 1QFY15, where FGV was affected by losses in the downstream division, the group’s gross profit improved by 53% from RM363.1mil to RM555.7mil in 2QFY15.

- Pre-tax loss of the downstream division swung from RM44mil in 1QFY15 to a positive RM14.5mil in 2QFY15 on the back of improved sales volume and profit margin in the fatty acid business.

- Excluding LLA changes, pre-tax profit of the plantation unit climbed from RM71.9mil in 1QFY15 to RM144.6mil in 2QFY15.

- Plantation division’s turnover expanded by 8.4% QoQ to RM2.4bil in 2QFY15 due to a higher volume of CPO production. FFB output expanded by 32% QoQ in 2QFY15. On a yearly basis, FGV’s FFB production declined by 9.3% in 1HFY15. Average CPO price realised was RM2,251/tonne in 2QFY15 versus RM2,279/tonne in 1QFY15.

- Production cost (ex-mill) was RM1,468/tonne in 1HFY15 compared with RM1,448/tonne in 1QHFY14. On a quarterly basis, production cost eased from RM1,534/tonne in 1QFY15 to RM1,402/tonne in 2QFY15 aided by an increase in FFB production.

- FGV’s gross cash fell from RM2.87bil as at end-March 2015 to RM2.27mil as at end-June 2015 while gross borrowings (including loans to major shareholder) increased from RM4.8bil to RM5bil.

- According to news reports, FGV is expected to sell its assets in North America for US$180mil to US$250mil (RM685mil to RM952mil). After the disposal, FGV’s downstream unit would be left with oleochemical and biodiesel operations in Malaysia. The disposal is expected to be completed within a year.

Source: AmeSecurities Research - 25 Aug 2015