4Q19 core net loss of -RM49.9m (vs. core net losses of -RM6.8m in 3Q19 and - RM38.6m in 4Q18) took FY19 core net loss to -RM163.9m (vs. core net loss of - RM272.2m in FY18). The results came in worse than our projected core net loss of RM130.7m in FY19, due to lower-than-expected average CPO price and FFB production. We cut our FY20-21 core net profit forecasts by 33.5% and 30.5%, mainly to account for higher CPO production cost (as management highlighted that it intends to bring forward the shortfall in manuring activities in FY19 to FY20). We downgrade our rating on FGV to HOLD (from Buy earlier), with a lower SOP-derived TP of RM1.14 (from RM1.72 earlier), as we lower our EV/ha valuation on FGV’s upstream plantation segment. The latest earnings performance indicates that FGV’s turnaround plan may not be realised soon.

Weaker-than-expected. 4Q19 core net loss of -RM49.9m (vs. core net losses of - RM6.8m in 3Q19 and -RM38.6m in 4Q18) took FY19 core net loss to -RM163.9m (vs. core net loss of -RM272.2m in FY18). The results came in worse than our projected core net loss of -RM130.7m in FY19, due to lower-than-expected average CPO price and FFB production.

Exceptional items (EIs). During 4Q19, we adjusted RM78.3m worth of EIs, which relates largely to (i) RM140.7m assumption revision for LLA, (ii) RM10m net impairment on PPE and receivables, (iii) RM6.7m commodity losses, and (iv) 1.7m reversal of impairment on financial assets.

Dividend. Proposed final DPS of 2 sen, subject to shareholders’ approval at forthcoming AGM.

QoQ. 4Q19 core net loss widened to -RM49.9m (from a core net loss of -RM6.8m in 3Q19), as higher realised average CPO selling price, improved performance at logistics and other segment, and narrowed losses registered at sugar segment were more than negated by lower FFB and CPO output, and higher CPO production cost (+12.7%).

YoY. 4Q19 core net loss widened to -RM49.9m (from -RM38.6m in 4Q18) due mainly to lower FFB and CPO production, higher CPO production cost, and losses at sugar segment.

YTD. FY19 core net loss narrowed to -RM163.9m (from -RM272.2m in FY18), and this was attributed to lower CPO production cost, higher FFB and CPO production, which altogether more than mitigated losses at sugar segment and lower average CPO price.

Identified other key growth areas. Management highlighted that it has identified several key growth areas, which it believes will contribute significantly to its bottom line in the next few years, which include, amongst other, diversifying into the production of cash crops (through the utilisation of 15,000 ha of oil palm replanting area), paddy farming, production of animal feed, and dairy farming.

Forecast. We cut our FY20-21 core net profit forecasts by 33.5% and 30.5%, mainly to account for higher CPO production cost (as management highlighted that it intends to bring forward the shortfall in manuring activities in FY19 to FY20).

Downgrade to HOLD; TP: RM1.14. We downgrade our rating on FGV to HOLD (from Buy earlier), with a lower SOP-derived TP of RM1.14 (from RM1.72 earlier), as we lower our EV/ha valuation on FGV’s upstream plantation segment. The latest earnings performance indicates that FGV’s turnaround plan may not be realised soon.

Source: Hong Leong Investment Bank Research - 9 Mar 2020