Highlights

• FGV is one of Malaysia’s leading globally diversified agricultural players, operating under 6 main business clusters, namely: (1) palm upstream; (2) palm downstream; (3) trading, marketing and logistics (TML); (4) sugar, via 51%-owned listed subsidiary MSM; (5) research and development (R&D) and agri-services; and (6) rubber.

• We believe FFB yield would have hit its trough by now and improve from FY17 onwards, underpinned by: (1) The absence of adverse weather condition, as weather forecasters recently indicated that likelihood of a La Niña event has diminished; and (2) There will be more than 70,000 ha of oil palm plantations approaching maturity over the next 1-3 years, which will in turn improve FGV’s overall FFB yield. Besides, we understand that management has also strengthened supervision on its oil palm plantation estates, as part of its plans to improve FFB yield.

• In a move to focus on its core businesses (i.e. upstream and downstream plantation businesses) and strengthen its balance sheet, FGV is aiming to monetise some of its noncore/ non-performing assets, via divestments.

• As part of the efforts to restore its profitability, FGV called off several acquisition plans, which will in turn result in administrative cost savings of RM100m within a year.

Risks

• Slower-than-expected earnings recovery, which will in turn impair investors’ confidence towards FGV;

• Sharp weakening of demand for edible oils (including palm oil), resulting in declining palm oil prices;

• Escalating production cost (in particularly labour costs); and

• Lower-than-expected FFB yield and OER.

Forecasts

• We project FY16 to turnaround with a projected core net profit of RM120.4m, underpinned by higher CPO price, lower administrative cost and a turnaround at the TML division. We are projecting FY17-18 core net profit to improve further to RM267.7m-292.2m, on higher projected average CPO price, higher FFB yield assumption, and full impact of administrative expense savings.

Rating

Initiate with HOLD, TP of RM2.44

• Positives – (1) Low-hanging fruits to turnaround financial performance; (2) Decent balance sheet; and (3) Low P/B (compared to its peers in Malaysia).

• Negatives – (1) Track record; and (2) Aggressive replanting exercise will remain a drag in the near term.

Valuation

• We value FGV at RM2.44 based on sum-of-parts methodology (20x FY17 net profit for its upstream plantation business, 1x book value for its downstream plantation business, and 14x FY17 net profit its sugar business).

Source: Hong Leong Investment Bank Research - 15 Sep 2016