• FGV’s 9M16 result was well below ours and consensus expectation with a net loss of RM98.2m.

• The higher palm oil price is insufficient to compensate for the drop in FFB and CPO production.

• Lower profit contribution from downstream, sugar and TMLO cluster contributed to the 9M16 loss.

• Reduction in administrative expenses and other operating costs were not sufficient to offset the loss due to weaker share of results from joint-ventures amounting RM45.2m.

• As the management expects the group might record a loss for full financial year 2016, we cut our forecast for FY16 and FY17, whilst TP is adjusted to RM1.36 from RM1.41 previously. We maintain our long-held view that FGV is overvalued hence our SELL recommendation. Disappointing 9M16 result. Although revenue increased by 6% to RM12.1bn in 9M16, FGV registered a core net loss of RM79m mainly due to i) lower FFB production of 2.98m MT compared to 3.46m MT in 9M15; ii) lower CPO production of 1.93m MT (-18% yoy); iii) lower profit contribution from downstream, sugar and TMLO segments; iv) loss from share of results from JV; and v) loss in share of associated results due to stock loss of RM57m. According to management, admin costs in 3Q16 were lower by 4% qoq and 32% yoy to RM194m. Other operating costs were also reduced by 67% to RM8.7m, indicating that the cost saving effort is on track. However, the reduction in administrative expenses and other operating costs were not sufficient to offset the loss due to weaker share of results from joint-ventures amounting RM62.3m. The overall performance was dragged down by the significant losses suffered by one of the jointly controlled entities in Turkey due to stock losses discovered in this quarter.

Plantation segment. Despite lower FFB and CPO production, plantation profit climbed 33% yoy to RM136.5m in 9M16. The higher profit is due mainly to higher CPO and PK prises realised and lower fair value charge in LLA of RM207.28m in 2016 compared to RM231.73m in 2015. CPO and PK price realised during the period was 10% and 59% higher at RM2,458/MT and RM2,386/MT respectively against RM2,236/MT and RM1,500/MT realised in 9M15. CPO production decreased by 18% yoy to 1.93m MT resulting from lower FFB yield of 11.06 MT/ha from 13.39 MT/ha in 9M15, hence, lowering FFB production by 14% yoy to 2.98m MT. Management guided that they have felling about 16,237 ha of areas with targeted planting of about 16,000 ha by year end and achieving average production cost of RM1,550/MT for full financial year 2016. As of 9M16, they have already planted 7,631 ha and CPO production cost (ex-mill) recorded during the 9-months period is RM1,624/MT (9M15: RM1,369/MT).

Downstream segment. Downstream segment recorded a higher revenue of 11% yoy due to better margin achieved in the US fatty acid business attributable to higher selling price and strengthening of the US dollar. However, the segment recorded a loss of RM6.76m (RM7.07m gain in 9M15) mainly due to weaker margins in RBDPKO and CPKO from kernel crushing business, as well as higher administrative cost posted in packed product business due to new refining plant in Pasir Gudang.

Sugar segment. Sugar segment posted lower segment profit of RM144.2m (-51% yoy) in 9M16 on the back of 11% increase in revenue to RM1.82bn as domestic and export sugar sales volume increased by 23% and 7% respectively. The lower PBT was attributed to lower gross margin of 7.9% recorded in 9M16 (-56% yoy) due to the effect of higher raw sugar and weakening ringgit which drove up cost of production. World price of raw sugar has increased by almost 60% YTD and now trading at USD20.35/IL versus last year average of USD13.12/IL. We understood that MSM is still in discussion with the government to raise current RM2.84/kg retail ceiling price for sugar for domestic market by between 20% and 30%. Hence, if this materialised this will support their earnings moving forward given the current environment of higher raw sugar price (90% of its costs of production) has hit the sugar refiner’s margins and bottom-line.

Trading, Logistic and Marketing (TLMO) segment. The TLMO segment’s PBT improved significantly registered a profit RM28.1m (RM39.3m loss in 9M15) on the back of higher revenue of RM5.25bn (7% yoy) mainly due to higher losses recorded in trading activities last year attributed by the realised and unrealised foreign exchange loss amounted of RM74.63m due to the effect of weakening RM against USD. However, the increase was partly offset by lower handling throughput by the Group’s bulking operation owing to lower CPO production volumes and decreased in income from IT services.

View & Valuation. As the management guided the group might record a loss for full financial year 2016, we cut our forecast for FY16 and FY17 lower to a loss of RM15.6m in FY16F and a net profit RM165.1m for FY17. Following the earnings revision, our TP is adjusted to RM1.36 (previously RM1.41) based on blended valuation of historical PBV and PNTA of 0.7x and 1.15x.

We maintain our conviction that FGV’s fundamentals remain weak and poorer than its peers hence, our SELL recommendation.

Source: BIMB Securities Research - 23 Nov 2016