9M18 core net loss of RM40.4m (vs. core net profit of RM48.1m) came in higher than our projected core net loss of RM10.3m for the full year, while the market was projecting a full-year net profit of RM116.1m. Lower-than-expected FFB production was the main culprit to the weaker-than-expected results. During the quarter, FGV registered a total impairment of RM788m, of which 65% of the impairment was related to goodwill impairment on the acquisition of Asian Plantations Limited. We raise FY18 projected core loss to RM34.8m and lower FY19 core net profit forecast by 26.4% to RM71.2m, large to account for lower FFB production assumptions. Maintain HOLD rating with a lower SOP-derived TP of RM1.12 (from RM1.53 previously).

Below expectations. 9M18 core net loss of RM40.4m (vs. core net profit of RM48.1m in SPYL) came in higher than our projected core net loss of RM10.3m for the full year, while the market was projecting a full-year net profit of RM116.1m. Lower-thanexpected FFB production was the main culprit to the weaker-than-expected results.

QoQ. 3Q18 returned to the black with a core net profit of RM31.6m (from a core net loss of RM61.1m in 2Q18), as lower realised palm product prices and weaker sugar contribution were more than mitigated by higher FFB production, lower CPO production cost, improved logistic contribution, and lower LLA cash payment.

YoY. 3Q18 core net profit declined by 53.3% to RM31.6m, mainly on lower FFB production, lower realised palm product prices, higher CPO production cost but partly offset by lower LLA cash payment.

YTD. 9M18 reversed to a core net loss of RM40.4m (from a core net profit of RM48.1m in 9M17), mainly due to lower realised palm product prices, higher CPO production cost, weaker downstream performance, JV losses, and higher finance costs.

Details on impairment in 3Q18. During the quarter, FGV registered a total impairment of RM788m, of which (i) RM713m was related to plantation division (of which RM513m was related to goodwill impairment on the acquisition of Asian Plantations Limited), (ii) RM57m was related to logistics division’s receivables and (iii) RM17m was related to investment holding companies.

Impact of minimum wage on earnings. Management disclosed that the recent announcement on minimum wage hike (from RM1,000 to RM1,100) will raise its total production cost by circa RM20m per annum.

Forecast. We raise FY18 projected core loss to RM34.8m and lower FY19 core net profit forecast by 26.4% to RM71.2m, large to account for lower FFB production assumptions.

Maintain HOLD with lower SOP-derived TP of RM1.12. We cut our SOP-derived TP on FGV by 26.8% to RM1.12 to reflect the downward revision in our FY19 net profit forecast. Despite the sharp retracement in recent share price and new management’s efforts to improve the company’s performance going forward (witnessed by its recent move to kitchen sink), we believe near-term share price performance will remain lacklustre, and re-rating catalyst could only emerge when CPO price sentiment improves and/or earnings performance improves. Maintain HOLD rating.

Source: Hong Leong Investment Bank Research - 29 Nov 2018