FGV announced that it is disposing its 100% stake in FGV China Oils Ltd for RM100m. Despite the disposal sum is much lower than FGV’s initial investment cost, we do not expect FGV to register loss arising from the disposal, as we believe the cost of investment has already been written down significantly previously. We are positive on the disposal, as it is in line with FGV’s plan to divest its non-core and/or non-performing assets, and allows FGV to better utilise its resources on return generating assets. We maintain our earnings forecasts, SOP-derived TP of RM1.13 and HOLD rating on the stock.

NEWSBREAK

Existing loss-making downstream business in China. FGV announced that it is disposing its 100% stake in FGV China Oils Ltd (which is involved in the processing, refining, storage and marketing of edible oils for the China markets) to Grand Industrial Co., Ltd for a total sum of RMB165m (or RM100m).

Recall, FGV acquired FGV China Oils Ltd for RMB320m in Mar-15, and the unit has been incurring losses since then, due to market disparity arising from competition among regional players. In 2016-2018, FGV China Oils Ltd incurred net losses of RMB67.5m, RMB32.3m and RMB25.4m, respectively.

The disposal is expected to complete between end-2019 and 1Q20, and proceeds from the disposal will be utilised as general working capital.

HLIB’s VIEW

Financial impact on FGV. Immaterial impact to FGV’s balance sheet as proceeds from the above-mentioned disposal will be reinvested into FGV’s business activities. Despite the disposal sum is much lower than FGV’s initial investment cost, we do not expect FGV to register loss arising from the disposal, as we believe the cost of investment has already been written down significantly previously.

Positive but not unexpected. We are positive on the disposal, as it is in line with FGV’s plan to divest its non-core and/or non-performing assets, and allows FGV to better utilise its resources on return generating assets. Recall in end-May, FGV reiterated that it is on track to divest RM350m worth of non-core and/or non performing assets, of which about RM150m worth of these assets were close to being disposed.

Forecast. Maintain, pending further details in our upcoming meeting with management.

Maintain HOLD, TP: RM1.13. We maintain our HOLD rating on FGV, with an unchanged SOP-derived TP of RM1.13 (see Figure #1).

Source: Hong Leong Investment Bank Research - 12 Jul 2019