Results

• 1Q17 core net profit of RM17.7m came in below expectations, accounting for only 10.4-13.7% of consensus and our full-year forecasts.

Deviations

• Weaker-than-expected performance at sugar division (which in turn was dragged by high raw sugar cost and weak MYR).

Highlights

• QoQ… Although revenue shrank by 16.8% to RM4.3bn, 1Q17 performance returned to the black, with core net profit of RM17.7m (from a core net loss of RM93.2m in 4Q16), as seasonally lower FFB output, and losses at sugar division were mitigated by higher palm product prices and better performance at logistic and others division.

• YoY… 1Q17 returned to the black with core net profit of RM17.7m (from a core net loss of RM60.9m a year ago), boosted mainly by higher palm product prices and CPO production, lower administrative expenses, and better performance at logistics and others sector, but partly offset by losses at sugar division (arising from higher raw sugar cost and weaker MYR).

• FFB output guidance maintained… FFB output increased by 2.9% yoy to 804k mt in 1Q17, as lagged impact of El Nino subsided since end-2016. Management is still keeping to its FFB growth guidance of 15% for 2017, as it anticipates FFB output to pick up more significantly in the next 2 quarters.

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

• FY17-19 core net profit forecasts cut by 16.9-41.4% to RM61.4m, RM99.9m and RM102.1m respectively, largely to account for higher raw sugar cost at sugar division.

Rating

HOLD ( ↔ )

• While we applaud management’s conscious move to improve FGV’s operations (which include downsizing staff force, embarking on aggressive replanting exercise, and tightening supervision of plantation operations), we believe near-term share price performance will remain weak given the weak near-term earnings outlook at the sugar division. Sugar division aside, we believe a re-rating on the stock would only be justified when core earnings improve.

Valuation

• Post earnings adjustment, SOP-derived TP on the stock is lowered by 2.9% to RM1.68 (see Figure 4)

Source: Hong Leong Investment Bank Research - 1 Jun 2017