During its briefing, FGV shared that it has undertaken several measures to improve its performance (both financially and operationally) and these include (i) formation of special board committee to closely monitor performance of FGV’s core businesses, (ii) establishment of transformation office, which is aimed at improving operating efficiencies at plantation division and ensuring the implementation of its transformation plan, (iii) improving its plantation operation, and (iv) review findings and various investigations, and proceed on possible legal recourse on past transactions/investments. The ongoing restructuring will likely involve a total impairment of RM300m over the next 3 years. Maintain earnings forecasts, SOP-derived TP of RM1.53, and HOLD rating.

We attended FGV’s briefing (chaired by the Chairman and Board of Directors), and walked away from the briefing feeling neutral on the company’s near-term earnings prospects.

Recap on 2Q18 results & new guidance on FFB output and production cost. FGV attributed the weak 2Q18 results to several factors, which include, amongst others, lower productivity (which missed targets, arising from labour shortage), lower average CPO price realised, higher CPO production cost, and higher JV and associate losses. Given the weaker-than-expected FFB production, FGV lowered its FFB output guidance by 4% to 4.65m tonnes in FY18, hence raising its CPO production cost to RM1,600/tonne (from RM1,562/tonne previously). Despite having lowered its FFB output target, FGV is still expecting FFB output in 2H18 to come in 35% higher than its FFB output (1.98m tonnes) in 1H18, underpinned by easing labour shortage and improved estate management.

Immediate turnaround plan. Given the poorer-than-expected performance (both financially and operationally), FGV has taken several measures to improve its performance, which include (i) formation of special board committee to closely monitor performance of FGV’s core businesses (i.e. plantation, sugar, and logistics divisions), and ensuring the implementation of best management practices, (ii) establishment of transformation office, which is aimed at improving operating efficiencies at plantation division and ensuring the implementation of its transformation plan, (iii) improving its plantation operation, and (iv) review findings and various investigations, and proceed on possible legal recourse on 6 past transactions/investments. Immediate turnaround plan aside, we understand that existing transformation plan will remain, which include (i) disposal of non-core and/or non-performing assets and (ii) MSS exercise (expected to cost RM55m) which will be carried out towards end-FY18, but likely involve a larger pool of employees (in particularly, at corporate level).

Expect impairment for the next 3 years. FGV shared that the ongoing restructuring will likely involve a total impairment of RM300m over the next 3 years, although details on impairment are not being shared at the moment.

Forecast. Maintained.

Maintain HOLD, TP: RM1.53. SOP-derived TP remains unchanged at RM1.53 (see Figure 1). While we applaud FGV’s move to undertake an immediate turnaround plan (on top of its existing transformation plan), we maintain our HOLD rating on FGV for now, pending on more notable improvement in coming quarters.

Source: Hong Leong Investment Bank Research - 4 Sept 2018