Highlights from yesterday’s small group session with FGV’s management include: (i) FGV is in the midst of addressing some of the issues raised by RSPO earlier, which include, amongst others, registration of >4,000 undocumented foreign workers in Sabah (which has already been rectified), and enhancing engagement with recruitment agencies, (ii) Despite output shortfall in 4Q19, FGV is still eyeing FFB output growth of 2 -4% in FY20, driven by increase in manpower and mature area, (iii) CPO price to range bound between RM2,200/tonne and RM2,400/tonne in 2020, (iv) on track to dispose non-core asset (worth ~RM70m) by end-1Q20, and (v) disposal of stake in MSM may not happen soon, but the worst is behind MSM. We maintain our core net profit forecasts, SOP-derived TP of RM1.72, and BUY rating on FGV.

Key Highlights From Yesterday’s Small Group Session With FGV’s Management Include:

Addressing issues with RSPO. Management shared that it is in the midst of addressing some of the issues raised by RSPO earlier, which include, amongst others, registration of >4,000 undocumented foreign workers in Sabah (which has already been rectified), and enhancing engagement with recruitment agencies. Recall, The RSPO’s complaints panel has suspended principles and criteria (P&C) certification processes for all of FGV’s uncertified and re-imposed its suspension on FGV’s Kilang Sawit Serting for non-compliance of the Complaints Panel decision. The suspension will be lifted upon FGV’s satisfactory implementation of the Complains Panel decision, verified by audits conducted by certification bodies in the period of 13 Jan 2020 and 31 Jul 2020.

2-4% FFB growth in FY20. We note that FGV clocked in FFB output growth of only 5.6% in FY19 (vs. its earlier FFB output growth guidance of 10.5%), due mainly to the sharp output shortfall in 4Q19. Moving into FY20, management is targeting FFB output growth of 2-4%, driven mainly by increase in manpower and mature area.

CPO price view. Management believes that CPO price will range bound between RM2,200/tonne and RM2,400/tonne in 2020. While low production (which may persist into 2H20) and bilateral trade deal with Pakistan bode well for CPO price, these may be offset by Coronavirus outbreak (which may result in lower palm oil demand from China), uncertainties arising from US-China trade war, and prolonged trade spat between Malaysia and India.

Non-core asset disposal on track. Management highlighted that it is on track to dispose its non-core asset (worth ~RM70m) by end-1Q20.

On 51%-owned MSM – Disposal may not happen soon, but worst is over. While management is still looking to divest its stake in MSM, we sense that the disposal may not happen soon. Disposal aside, we feel that the worst is behind MSM, as we gathered that MSM has recent restructured its loan and is currently in talks to a party for the offtake of its unutilised capacity in its sugar refinery in Johor. Besides, management shared the enhancement of product offering and renegotiation of the terms of raw sugar supply would also help bringing MSM into better shape.

Forecast. Maintain for now, pending release of 4Q19 results by end-Feb.

Maintain BUY; TP: RM1.72. We maintain our BUY rating on FGV, with unchanged SOP-derived TP of RM1.72 (see Figure #1).

Source: Hong Leong Investment Bank Research - 11 Feb 2020