Results

• Another disappointing quarter. 3QFY16 core net loss of RM90.2m took 9MFY16 core net loss to RM138.1m vs. consensus and our full-year earnings forecasts of RM118.3m and RM120.4m respectively.

Deviations

• Higher-than-expected CPO production cost;

• Weaker-then-expected performance at 51%-owned listed subsidiary (MSM) arising from rising raw sugar cost and weaker MYR (against the US$);

• RM57m stock loss incurred on a JV company in Turkey (FISB) due to possible accounting fraud.

Highlights

• QoQ… 3Q16 reversed into a core net loss of RM90.2m (from a core net profit of RM13.1m in 2Q16), mainly on: (1) Higher fair value charge on LLA liability (RM105.3m vs. RM12.2m in 2Q16); (2) Weaker earnings at 51%-owned listed subsidiary (MSM); (3) Widened JV losses (arising from erosion in RBDPKO and CPKO margin at kernel crushing business); and (4) Losses at trading, marketing and logistic (TML) division (arising from unrealized loss on derivatives and lower IT service income).

• YTD… 9M16 core net loss narrowed to RM138.1m (from RM193.9m in previous year), due to lower fair value charge on LLA liability, narrower losses at TML division and improved contrition from downstream segment (at operating level), which more than offset weaker earnings at sugar division and RM57m stock loss at JV level.

• Highlights from conference call: (1) May incur impairment and provision in 4Q16; (2) Expects more meaningful FFB output recovery from 2Q17; (3) In the midst of assessing the possibility of changing the accounting policy on replanting and plantation development cost; and (4) Updates on transition plan.

Risks - downside

• Lower-than-expected earnings recovery, hampering investors’ confidence towards FGV;

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

• Lower-than-expected FFB yield and OER.

Forecasts

• We revise our FY16 forecast to a core loss of RM97.7m (from core earnings of RM120.4m earlier), largely to account for higher CPO production cost assumption, lower earnings at sugar division and RM57m stock loss at JV. FY17-18 core earnings forecasts cut by 60.9% and 58.9% respectively, to account for lower FFB yield assumption and lower earnings assumption at sugar division.

Rating

HOLD ( ↔ )

• While valuation appears attractive (from P/B viewpoint) at current share price, we expect share price to remain depressed due to potential impairment in 4Q16, which will result in FGV recording another loss making year (FY16).

Valuation

• SOP-derived TP lowered by 33.6% to RM1.62 post downward earnings forecast adjustment. Maintain HOLD .

Source: Hong Leong Investment Bank Research - 23 Nov 2016