1H19 core net loss of RM107.2m (vs. core net loss of RM72m in 1H18) missed our expectation, and key culprits to the disappointing set of performance include (i) larger-than-expected losses at sugar segment, (ii) lower-than-expected FFB production, and (iii) higher-than-expected finance cost. During the briefing, management shared that fertiliser cost for FY19 will come in lower than previous year, due mainly to cost savings arising from its efforts in rationalising the procurement process, hence containing CPO production cost. We revised our FY19 projection to a core net loss of RM67.6m (from a core net profit of RM44.0m previously), and lower our FY20-21 core net profit forecasts by 35.8-44.9%, mainly to account for (i) lower FFB output assumption, (ii) higher loss assumption a t sugar segment, and (iii) higher finance cost assumption. Maintain HOLD rating with a lower sum-of-parts TP of RM0.97.

Disappointing 2Q19 results. FGV’s core net loss of RM120.2m in 2Q19 (vs. core net profit of RM13m 1Q19 and core net loss of RM61.1m in 2Q18) took 1H19 core net loss to RM107.2m (vs. core net loss of RM72m in 1H18). While we have already anticipated 2Q19 to come in weaker (on a QoQ basis), the results still missed our expectation, and key culprits to the disappointing results include (i) larger-than-expected losses at sugar segment, (ii) lower-than-expected FFB production, and (iii) higher-than-expected finance cost.

QoQ. 2Q19 performance reversed to a core net loss of RM120.2m (from a core net profit of RM13.0m in previous quarter), as improved performance at logistic segment was more than offset by (i) losses at plantation segment (arising from lower realised average CPO price and sales volume, as well as higher CPO production cost) and (ii) losses at sugar segment (arising from lower sales volume and selling prices, as well as higher finance cost).

YoY. 2Q19 net loss widened to RM120.2m (from RM61.1m a year ago), as improved FFB production, lower CPO production cost, and higher contribution from logistic segment were more than offset by sharply lower realised average CPO price (which has declined by 19.2% since a year ago) and losses at sugar segment (arising from lower selling prices and sales volume).

YTD. 1H19 core net loss widened to RM107.2m (from RM72.0m in 1H18), as lower LLA cash payment and CPO production cost, coupled with higher FFB production were more than offset by significantly lower realised average CPO price and losses at sugar segment (arising from lower sales volume and selling prices), and higher finance cost.

CPO production cost. Ex-mill CPO production cost increased by 5.5% QoQ to RM1,455/tonne, mainly due to higher fertiliser application. While fertiliser application will continue to play a catch up in 2H, management shared that fertiliser cost for FY19 will still come in lower than FY18, due mainly to cost savings arising from rationalisation of procurement process, hence containing CPO production cost.

Forecast. We revised our FY19 projection to a core net loss of RM88.9m (from a core net profit of RM44.0m previously), and lower our FY20-21 core net profit forecasts by 35.8-44.9%, mainly to account for (i) lower FFB output assumption, (ii) higher loss assumption at sugar segment, and (iii) higher finance cost assumption.

Maintain HOLD; TP: RM0.97. We lower our sum-of-parts TP on FGV by 14.9% to RM0.97, to account for lower core net profit forecasts and latest share price of 51%- owned MSM. Maintain HOLD rating on the stock.

Source: Hong Leong Investment Bank Research - 29 Aug 2019