Investment Highlights

• Maintain HOLD on Felda Global Ventures (FGV) with a lower fair value of RM1.85/share (vs. RM2.00/share previously). Our fair value of RM1.85 is 1.2x of FGV's book value of RM1.54/share.

• FGV's 1QFY18 results were below our forecast and consensus estimates. We have reduced FGV’s FY18F net profit by 23.5% to account for a weaker CPO price assumption and earnings downgrade for 51%-owned MSM Malaysia. We have lowered our FY18F CPO price assumption for FGV from RM2,650/tonne to RM2,450/tonne.

• FGV recorded a wider core net loss of RM10.9mil (adjusted for land lease changes) in 1QFY18 compared with RM0.3mil in 1QFY17. This was due to a lower CPO price, higher effective tax rate of 68% and loss-making associates in 1QFY18.

• There were no significant impairments or provisions in 1QFY18. In contrast in 1QFY17, FGV recorded impairment and provision of RM62.4mil in respect of a customer in Afghanistan and a legal suit filed against FGV by a shipping company in India.

• Operationally, FGV improved YoY in 1QFY18 as profit turnarounds in the sugar and logistics units helped compensate for weaker plantation earnings. MSM swung into a net profit of RM15.8mil in 1QFY18 vs. a net loss of RM34.6mil in 1QFY17 as the cost of raw sugar imports slid. MSM accounted for 33.5% of FGV's pre-tax profit (before reconciliation adjustments) in 1QFY18.

• FGV's plantation pre-tax profit fell by 61.4% YoY in 1QFY18 dragged by a decline in CPO price and inventory writedown of RM12mil in the palm kernel segment. Average CPO price dropped by 19.2% from RM3,061/tonne in 1QFY17 to RM2,472/tonne in 1QFY18.

• FGV recorded a production cost (ex-mill) of RM1,728/tonne in 1QFY18 vs. RM1,736/tonne in 1QFY17. The group expects its ex-mill production cost to be RM1,562/tonne in FY18F vs. RM1,592/tonne in FY17.

• FGV's FFB production improved by 23.8% YoY in 1QFY18 as FFB yield increased and the group received more foreign workers at its oil palm estates. FGV was short of 7,000 to 8,000 estate workers in FY17. FGV hopes to achieve a FFB production growth of 14% in FY18F.

Source: BIMB Securities Research - 30 May 2018