Highlights

• According to Starbiz and TheEdge Weekly, a major reshuffle is on the cards for FELDA and FGV, which could involve:
• FELDA seeking the return of the land that is currently leased out to and managed by FGV; and/or
• The emergence of a new shareholder in FGV.
• About 335,000 ha from FELDA’s total landbank (of 850,000 ha) are currently run by FGV under a land lease agreement (LLA), which was established since 2012. On the other hand, FGV had in the past repeatedly expressed its desire to renegotiate the terms of LLA (comprising a fixed lease payment of RM250m p.a. and a 15% share of FGV’s annual profits derived from the LLA-related land). According to the IPO prospectus of FGV, FGV will be compensated should the termination of LLA occurs less than 8 years from the date which the FELDA-leased land was replanted.
• The new shareholder is said to be an investment vehicle led by Wilmar International Ltd co-founder Martua Sitorus, either through shares acquisition and/or injection of plantation assets into FGV. On the other hand, TheEdge Weekly reported that the new shareholders will be 2 Indonesian businessmen, Tan Sri Peter Sondakh and Martua Sitorus via injection of assets, and they will end up collectively holding about 25% stake in FGV post asset injections.

Comments

• We believe the latest news flows are positive for FGV’s near- term share price performance, particularly for the potential detach of FELDA-related land from FGV (which will improve FGV’s performance, if it materializes).

Forecasts

• Maintained for now, pending release of 1Q17 results by end- May. Risks – downside
• Weaker-than-expected FFB output;
• Escalating labour cost, which will in turn result in higher production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Rating

HOLD (↔)

• While valuation appears attractive (from P/B viewpoint) at current share price, we believe a re-rating to FGV’s share price would only emerge when earnings improve in FY17.

Valuation

• Maintain HOLD recommendation and SOP-derived TP of RM1.73 for now, pending release of 1Q17 results by end-May.

Source: Hong Leong Investment Bank Research - 02 May 2017