Highlights

• FGV introduced a Voluntary Separation Scheme (VSS) for its general managers and above as part of manpower optimisation exercise.

• Out of the 236 senior management staff who had received the offer, it expects a take up of 15% of the VSS. However, there is no significant change in current management structure, according to Datuk Zakaria (group president and CEO).

Comments

• We are positive on FGV’s latest move at it shows FGV’s continued commitment in improving its cost structure and earnings.

• While there is no mention on the expected staff cost savings and one-off VSS expense arising from VSS, we believe the exercise will improve FGV’s earnings significantly, given its low earnings base (recall, FGV recorded a core net profit of only RM1.1m in 1H17).

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

• Maintain for now, pending 3Q17 results release (expected by end-Nov).

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

• Maintain SOP-derived TP on the stock at RM1.67 (see Figure 1).

Source: Hong Leong Investment Bank Research - 06 Nov 2017