FY18 core net loss of RM225.2m (vs. core net profit of RM108.7m in FY17) came in higher than our and consensus projected core net losses of RM126.7-193.7m, due mainly to lower-than-expected FFB production. Management expects its turnaround initiatives and ongoing replanting programme will result in higher FFB output and lower CPO cost production from FY19 onwards. Despite the results disappointment, we maintain our FY19-20 net profit forecasts of RM38- 44.7m, as we believe the company will start on a clean slate after the massive impairment incurred in FY18. We maintain our SOP-derived TP on FGV at RM0.80, but downgrade our rating to SELL (from Hold previously), as we believe investors have built up too much optimism on FGV’s turnaround plan. While we laud management’s relentless efforts in turning around FGV’s performance, we believe such efforts would take a while to bear fruits meaningfully.

Higher-than-expected core net loss. FY18 core net loss of RM225.2m (vs. core net profit of RM108.7m in FY17) came in higher than our and consensus projected core net losses of RM126.7-193.7m. Lower-than-expected FFB output (4.2m tonnes vs. 4.5m tonnes we projected) was the main culprit to the results disappointment.

QoQ. 4Q18 core net loss narrowed to RM19.4m (from RM61.2m in 3Q18), as lower average CPO price (-7.7%), weaker performance at sugar division and higher tax expense were more than offset by higher CPO sales volume and better performance at logistic and support businesses division (arising from improved contribution from bulking and commodities marketing business).

YoY. 4Q18 turned into a core net loss of RM19.4m (from a core net profit of RM60.6m in 4Q18) mainly on the back of lower realised average CPO price and FFB output at the plantation division, weaker performance at sugar division and higher tax expense.

YTD. FY18 turned into a core net loss of RM225.2m (from a core net loss of RM108.7m in FY17), mainly due to weaker plantation performance (arising from lower realised average CPO price, margin erosion in kernel crushing and refining business, and higher CPO production cost (RM1,737/tonne vs. RM1,592/tonne in FY17).

Update on turnaround plan. FGV has so far implemented several initiatives at the plantation division, which is aimed at improving its productivity and operating cost efficiencies. These, coupled with improving age profile (arising from its ongoing replanting programme), will result in FFB output growth of 13.8% and 7.3% in FY19- 20 and lower CPO production cost of RM1,469/tonne and RM1,464/tonne in FY19-20 (vs. RM1,737/tonne achieved in FY18).

To turnaround in FY19. Management seems confident that it will successfully turnaround FGV, underpinned by ongoing cost rationalisation (which involves, amongst others, manpower rationalisation and optimisation of manuring programme), improved operational performance (arising from its turnaround plan implemented so far).

Forecast. Despite the results disappointment, we maintain our FY19-20 net profit forecasts of RM38-44.7m, as we believe the company will start on a clean slate after the massive impairment incurred in FY18.

Maintain TP of RM0.80; downgrade to SELL. We maintain our SOP-derived TP on FGV at RM0.80 (see Figure 2), but downgrade our rating to SELL (from Hold previously), as we believe investors have built up too much optimism on FGV’s turnaround plan. While we laud management’s relentless efforts in turning around FGV’s performance, we believe such efforts would take a while to bear fruits.

Source: Hong Leong Investment Bank Research - 1 Mar 2019