We believe FGV deserves a relook into, given its 51% stake in MSM, which may re-rate FGV’s share price if the stake sale materialises. While the disposal of MSM stake will likely result in FGV incurring disposal loss (or impairing the remaining stake in MSM if it is a partial disposal), we still view the move positively, as it will reduce MSM’s share of losses to FGV and FGV’s net gearing. We raise our FY19 net loss forecast by 47% to RM130.7m, to account for larger loss assumptions at sugar division and JV losses. We took this opportunity to switch our valuation methodology, to better reflect the value of FGV’s businesses. Post revision of valuation methodology, we upgrade our rating on FGV to BUY (from Hold previously) with a SOP-derived TP of RM1.22 (from RM0.97 previously). Besides, we note that FGV is a proxy to rising CPO prices, given its high earnings sensitivity to CPO price movement.

Recap on 2Q19 results. FGV’s performance reversed to a LBT of RM56.8m in 2Q19 from a PBT of RM23.4m in 1Q19, dragged mainly by losses registered at sugar and plantation segments (see Figure #1 for details), and we believe weak 2Q19 performance was the main culprit to FGV’s share price downtrend since Aug-19.

Weak near-term performance remains, but potential disposal of stake in MSM may re-rate FGV. While FGV’s performance will likely remain weak in 3Q19 (as CPO price only started recovering since Aug-19 and raw sugar cost will remain high for the rest of 2019), we believe FGV deserves a relook into, given its 51% stake in MSM Malaysia (MSM), which may re-rate FGV’s share price (if the stake disposal materialises).

Recall, FGV confirmed that it was in talks with several parties to dispose part of its 51% stake in MSM. According to The Edge Financial Daily, there are at least 4 companies that are eyeing FGV’s stake in MSM including JAG Capital Sdn Bhd, Wilmar International (which later denied that it was in talks with FGV through PPB Group), and 2 other unnamed foreign companies.

Assessing potential impact of MSM stake sale on FGV. The disposal of its stake in MSM will likely result in FGV impairing its remaining stake in MSM (if it is a partial disposal) or incurring disposal loss (if it disposes its entire 51% stake), as we believe FGV will likely dispose its stake in MSM at below book value (given that MSM is loss making). However, we still view the potential disposal positively, as the disposal will reduce MSM’s share of losses to FGV and FGV’s net gearing.

Forecasts. We raise our FY19 net loss forecast by 47% to RM130.7m, to account for larger loss assumptions at sugar division and JV losses. We maintain our FY20-21 core net profit forecasts at RM7.1-18.0m based on average CPO price assumption of RM2,200/tonne and FFB output of 4.9m tonnes and 5.4m tonnes, respectively.

Upgrade to BUY with higher TP of RM1.22. We took this opportunity to switch our valuation methodology, to better reflect the value of FGV’s businesses. We now value FGV based on (i) EV/ha of RM20k on plantation segment (at 50% discount to regional peers to reflect its still weaker than peers’ performance), (ii) 0.6x P/B on MSM (to reflect MSM’s loss making position), and (iii) 8x FY20 for its logistic segment. Post revision of valuation methodology, we upgrade our rating on FGV to BUY (from Hold previously) with a SOP-derived TP of RM1.22 (from RM0.97 previously). Besides, we note that FGV is a proxy to rising CPO prices, given its high earnings sensitivity to CPO price movement.

Source: Hong Leong Investment Bank Research - 17 Oct 2019