Core net loss of RM10.8m missed expectations, as HLIB and market were projecting a full-year core net profit of RM168m and RM197.4m. Key variances against our forecast include (i) higher-than-expected production cost, (ii) weaker-than-expected performance at sugar division, and (iii) weaker-than expected JV and associate results. Despite the weak 1Q18 results, we are projecting FGV to post better performance in subsequent quarters, underpinned by higher FFB production and lower CPO production cost (in particularly 2H18). We cut our FY18-20 core net profit forecasts by 26.8-41.7%, largely to account for higher CPO production cost and lower earnings assumption at MSM. We maintain our HOLD recommendation with a lower SOP-derived TP of RM1.82 to reflect (i) lower core net profit forecast, (ii) the roll-forward of valuation base year for the plantation division (to FY19), and (iii) the switch in our valuation methodology for the sugar division to 1x P/B multiple.

Missed expectations. 1Q18 core net loss of RM10.8m missed expectations, as HLIB and market were projecting a full-year core net profit of RM168m and RM197.4m respectively. Key variances against our forecast include (i) higher-than-expected production cost, (ii) weaker-than-expected performance at sugar division, and (iii) weaker-than-expected JV and associate results.

QoQ. 1Q18 reversed to a core net loss of RM10.8m (from a core net profit of RM60.6m in 4Q17) mainly on the back of (i) seasonally lower FFB production (which declined by 16.5% to 991k mt) and lower palm product prices, which have resulted in plantation division’s operating profit declining by 86.6% to RM41.9m, (ii) lower sales volume and average selling price for sugar business, which have in turn resulted in sugar division’s operating profit declining by 8.7% to RM28.7m, (iii) higher finance cost, and (iv) associate losses.

YoY. 1Q18 reversed to a core net loss of RM10.8m (from a core net profit of RM4.2m a year ago), as higher FFB production (+23.2%), turnaround at sugar division and better performance at logistic and support business division were negated by (i) higher production cost and lower palm product prices, (ii) higher finance cost, and (iii) weaker associate and JV contributions.

FFB production guidance of 4.85m tonnes for FY18 maintained. FFB production increased by 23.2% yoy to 991k mt in 1Q18, management is keeping to its FFB production guidance of 4.85m mt for FY18, underpinned by easing labour shortage issue (as ~90% of FY18 foreign labour has been met as at Apr-18) and more mature areas moving into mature brackets.

Lower production cost in 2H. Management shared that CPO production cost (RM1,732/mt in 1Q18) will trend down in subsequent quarters (in particularly 2H) and average at RM1,562/mt as it expects manuring programme to complete by as early as end Sep-18 and higher FFB production.

Forecast. We cut our FY18-20 core net profit forecasts by 26.8-41.7%, largely to account for higher CPO production cost and lower earnings assumption at MSM.

Maintain HOLD with lower SOP-derived TP of RM1.82. We maintain our HOLD recommendation with a lower SOP-derived TP of RM1.82 (from RM2.01 previously) to reflect (i) the downward revision in our core net profit forecasts, (ii) the roll-forward of valuation base year for the plantation division (from FY18 to FY19), and (iii) the switch in our valuation methodology for the sugar division to 1x P/B multiple (from 14x FY18 earnings previously, as we opine that P/E multiple is no longer viable for the sugar business given its challenging earnings outlook).

Source: Hong Leong Investment Bank Research - 30 May 2018