Results

• 9M17 core net profit of RM79.3m (vs. core net loss of RM63.9m in 9M16) beat expectations, accounting for 106.5-163.3% of consensus and our full-year forecasts.

Deviations

• Better-than-expected performance at sugar (arising from lower raw sugar cost) and logistics and others divisions.

Dividend

• Declared interim DPS of 5 sen (ex-date: 7 Dec 2017).

• QoQ… 3Q17 performance turned around with a core net profit of RM78.2m (from a core net loss of RM21.2m in 2Q17), thanks to: (1) Higher CPO sales volume and lower CPO production cost; (2) Lower raw sugar cost, which has in turn resulted in better performance at the sugar division; and (3) Turnaround at the logistics and others division.

• YoY… 3Q17 performance improved significantly to a core net profit of RM78.2m (from a core net loss of RM11.9m in 3Q16), mainly on the back of better contribution from plantation division (arising from higher palm product prices and FFB production, as well as higher sales volume and forex gain at the fertilizer segment), which more than offset weaker sugar earnings (arising from higher raw sugar cost and a weaker MYR).

• YTD… 9M17 performance turned around with a core net profit of RM79.3m (from a core net loss of RM63.9m a year ago) mainly on the back of better performance at plantation and logistics and others divisions were partly offset by losses at sugar division.

• FFB output guidance… FFB output grew 3.3% to 3.07m tonnes in 9M17. Management still keeps to its guidance of 4.3m tonnes in 2017 (15% growth), as it expects the strong FFB output in 3Q to sustain into 4Q as labour shortage issue eases. Moving into 2018, management is guiding FFB output to grow 13% to 4.85m tonnes, as labour shortage issue eases and more areas are moving into mature brackets.

• On VSS… A one-off VSS expense of RM12m will be incurred in 4Q17, and this will be recouped within a year.

Risks - Downside

• Slower-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 raised by 114%, 31% and 34% respectively, large to account for lower raw sugar cost at MSM and cost savings from VSS exercise.

Rating

HOLD ( ↔ )

• The ongoing transformation plan (which includes downsizing staff force, embarking on aggressive replanting exercise, and tightening supervision of plantation operations) seems to have started bearing fruits (witnessed by sharp improvement in 3Q17 results). We believe a rerating catalyst is warranted should the good earnings performance sustain into the next few quarters.

Valuation

• Post earnings adjustment, SOP-derived TP on the stock is raised by 7.2% to RM1.79 (see Figure 5).

Source: Hong Leong Investment Bank Research - 24 Nov 2017