1Q19 core net profit of RM13m came in above our expectation, accounting for 34.2% of our full-year estimates, mainly on the back of lower-than-expected CPO production cost and better-than-expected contribution from LSB sector, which altogether more than offset weaker-than-expected palm product prices and performance at sugar division. During the briefing, management highlighted that it is on track to lower its CPO production cost in FY19, and divest RM350m worth of non-core and/or non-performing assets. Following the strong set of 1Q19 results, we raise our FY19-20 core net profit forecasts by 16- 34% to RM44m and RM59.8m, and SOP-derived TP to RM1.12. Upgrade from Sell to HOLD.

Above our expectations. FGV reported 1Q19 core net profit of RM13m (vs. core net losses of -RM19.4m in 4Q18 and -RM10.8m in 1Q18) came in above our expectation, accounting for 34.2% of our full-year estimates, mainly on the back of lower-than expected CPO production cost and better-than-expected contribution from logistics support business (LSB) sector, which altogether more than offset weaker-than expected palm product prices and performance at sugar division. Against the consensus, the results accounted for 20.1% of consensus full-year estimate.

QoQ. 1Q19 returned to the black with a core net profit of RM13m (vs. a core net loss of -RM19.4m in 4Q18), as lower palm product prices and FFB production, and losses incurred at sugar division (arising from lower ASP and higher raw refining cost) were more than mitigated by lower CPO production cost (partly driven by lower fertiliser application), improved contributions from downstream plantation segment and logistics support business sector.

YoY. 1Q19 core net profit turned around with a core net profit of RM13m (vs. a core net loss of -RM19.4m), as lower palm product prices and weaker contribution from sugar division were more than mitigated by higher FFB production, lower CPO production (partly driven by lower fertiliser application), and improved contributions from downstream plantation segment.

CPO production cost. Ex-mill CPO production cost declined significantly to RM1,379/mt in 1Q19 (from RM1,572/mt in 4Q18 and RM1,728/mt in 1Q18). While the decline was partly due to lower fertiliser application in 1Q19 (which will eventually catch up for the remaining quarters, hence resulting in higher fertiliser cost), management seems confident that it is on track to lower its CPO production cost in FY19, underpinned by FFB production growth and improved efficiencies.

Non-core and non-performing asset disposal. FGV is on track to divest RM350m worth of non-core and/or non-performing assets, of which about RM150m worth of these assets are closed to being finalised.

Forecast. We raise our FY19-20 core net profit forecasts by 16-34% to RM44m and RM59.8m, largely to account for lower CPO production cost assumption and higher earnings assumptions from logistics services business sector, which more than mitigated lower palm product price assumptions in FY19 (after taking into account of the realised selling prices in 1Q19), and lower earnings assumptions at sugar division.

Upgrade to HOLD with higher TP of RM1.12. We raise our SOP-derived TP on FGV to RM1.12 (from RM0.80 earlier) after upward adjustment to our core net profit forecasts and update of latest share price of 51%-owned listed subsidiary (MSM). Upgrade to HOLD (from Sell) as management’s relentless effort in turning around FGV’s performance has started yielding fruits.

Source: Hong Leong Investment Bank Research - 30 May 2019