We deem 9M19 core net loss of -RM114m broadly within our expectation, as we expect sugar segment will remain as drag to FGV’s bottom-line in 4Q. We maintain our FY19 projected core loss of -RM130.7m in FY19, but raise our FY20-21 core net profit forecasts by 32.5% an 103.7% to RM41.6m and RM65.8m, respectively, largely to account for lower CPO production cost assumption. We raise our sum-of-parts TP on FGV marginally (by 1.4% to RM1.44 to account for the latest book value for 51%-owned MSM and its latest net debt position. We continue to like FGV for its high earnings sensitivity to CPO price movement. Maintain BUY rating on the stock.

Within our expectation. 3Q19 core net loss of -RM6.8m (vs. core net losses of - RM120.2m and -RM61.2m in 2Q19 and 3Q18) took 9M19 core net loss to -RM114m (vs. core net loss of -RM133.2m in 9M18). We consider the results broadly within our expectation (we projected core net loss of -RM130.7m in FY19), as we expect sugar segment will remain as drag to FGV’s bottomline in 4Q. we note that market consensus projected a full-year core net loss of -RM78.9m.

QoQ. 3Q19 core net loss narrowed significantly to -RM6.8m (from -RM120.2m in 2Q19), helped mainly by lower plantation core net loss (arising from a 7.5% QoQ increase in FFB output, 1.4% increase in CPO price realised and lower finance cost, which more than mitigated higher CPO production cost). This more than offset higher loss contribution from sugar segment (arising from lower ASP, higher refining cost and finance cost).

YoY. 3Q19 core net loss narrowed to -RM6.8m (from -RM61.2m in 3Q18) as lower CPO price realised and losses from sugar division were more than mitigated by a 14.8% increase in FFB output, a 15.6% reduction in CPO production cost, and better performance at logistic segment (thanks to higher tonnage carried and storage volume).

YTD. 9M19 core net loss lowered to -RM114m (from -RM133.2m a year ago), as lower CPO price realised (which declined by 16.7% to RM1,975/tonne), higher finance cost and losses at sugar segment were more than offset by a 19.6% reduction in CPO production cost, a 12.4% increase in FFB output (to 3.44m tonnes), higher OER and lower LLA cash payment.

FFB output. FFB output increased by 12.4% to 3.44m tonnes in 9M19, and management lowered its guidance for the full-year marginally to 4.65m tonnes (from 4.8m tonnes previously). While FGV could only apply 60-65% of its fertiliser requirement in FY19, management believes the lower fertiliser application will unlikely hamper FFB output in FY20 (and it is still projecting FFB output growth).

Forecast. We maintain our FY19 projected core loss of -RM130.7m in FY19, but raise our FY20-21 core net profit forecasts by 32.5% an 103.7% to RM41.6m and RM65.8m, respectively, largely to account for lower CPO production cost assumption.

Maintain BUY; TP: RM1.44. We raise our sum-of-parts TP on FGV marginally (by 1.4% to RM1.44 to account for the latest book value for 51%-owned MSM and its latest net debt position. We continue to like FGV for its high earnings sensitivity to CPO price movement. Maintain BUY rating on the stock.

Source: Hong Leong Investment Bank Research - 5 Dec 2019