• Overview. FGV’s posted LATAMI of RM142m in 1Q20 (<100% yoy/qoq) on the back of 15%/12% decline in revenue to RM2.78bn due to losses in plantation sector as a result of lower FFB production and lower margin recorded in both plantation and sugar sector. Its CPO cost exmill increased 29%/58% to RM2,177/MT from RM1,691/MT in 4Q19 and RM1,375/MT in 1Q19.

• Key highlights. Lower FFB production was affected by a decline in FFB yield due to dry weather experienced in Q1 and Q3 2019 and reduced application of fertiliser in 2019. This was further impacted by approx. 19k MT production loss on the suspension of Sabah’s plantation operations in Lahad Datu and Kinabatangan in March 2020 (Table 3).

• Against estimates: below. 3M19 core profit was below our and consensus’ estimates.

• Outlook. Although we are positive that FGV is on track to achieve its transformation plan targets, we are of the view that there will be persistent margin pressure and possibility of further impairment in the future. We expect earnings for this year will be dampened by low FFB and CPO production, higher costs and slower demand. Given the current scenario of lower yield achieved, there is a high possibility that FGV will miss its FFB production target for this year of c. 4.5m-4.7m tonnes.

• Our call: HOLD. Given the challenging business environment, we changed our FY20 and FY21 earnings forecast lower to RM5.4m and RM26.6m respectively from RM10.8m and RM45.9m – as we adjusted our ASP of palm products, productions and margins assumptions lower. Hence, we revised our TP to RM1.04 from RM1.23 previously based on P/B of 0.8x and 3-years average BV/share of RM1.30.

Source: BIMB Securities Research - 29 May 2020