• FGV’s 1Q17 results were below ours and consensus expectation with PATAMI of RM2.5m.

• Higher raw sugar cost, impairment of receivables and provision for litigation loss on vessel arrest as well as lower contribution from jointly-controlled entity contributed to a loss before tax of RM31.3m.

• Group CPO production increased 16.5% yoy to 565.6k tones whilst FFB production improved 3% to 804.1k tones.

• We have revised our FY17 and FY18 forecast, whilst maintaining TP at RM1.59 as we adjust our revenue, earnings and costs assumptions. .

Core net earnings breakeven at RM0.5m

Adjusted for fair value changes in LLA liability, FGV posted a core net earnings of RM0.5m in 1Q17 vs. a loss of RM75.6m in 1Q16 mainly due to 1) higher CPO production of 565.6k MT compared to 485.4k MT in 1Q16; 2) higher ASP of palm product realized; 3) lower CPO production cost (ex-mill) of RM1,739/MT (1Q16:RM1,824/MT); 4) lower administrative expenses by 15% yoy to RM220m; and 5) reversal of provision for bonus of RM36.5m. EBIT margin increased to 2.1% from -2.2% for the same period last year

Revenue improved but earnings was offset by….

Revenue increased by 15% yoy to RM4.3bn, but earnings was dampened by 1) higher raw sugar prices of RM2,697/MT (1Q16: RM2,139/MT), 2) impairment of receivables and provision for litigation loss on vessel arrest amounting to RM29.61m and RM32.79m respectively in plantation sector, and 3) lower share from JV due to higher unrealized foreign exchange gain recorded in 1Q16.

On qoq, earnings were hit on all front.

Besides the continuous higher raw sugar cost and impairments and provision mentioned above, qoq earnings was lower against 4Q16 as a result of lower revenue from both plantation and sugar segment due to lower sales volume. Fair value charge of RM97.5m as against a gain of RM139m in 4Q16 and lower FFB and CPO production also contributed to the lower earnings.

Adjusted our forecast

We have done some house-keeping and revised lower our earnings forecast for FY17, FY18 and FY19 to RM146.9m (RM165.1m), RM214.1m (RM264.2m) and RM247.8m (RM302.4m) respectively, as we adjust our assumptions for revenue, earnings and costs assumptions.

Maintain Sell.

Maintain Sell with unchanged TP of RM1.59 based on blended valuation average of 2-years historical PBV and PNTA of 1x and 1.35x. As we mentioned in our previous report, we would like to see tangible and improved results from FGV management’s announced measures to boost earnings via improved efficiency, and greater focus on its core business. Maintain SELL.

Source: BIMB Securities Research - 1 Jun 2017