FGV’s core net loss of –RM222.5m in 1H20 (vs. core net loss of –RM156.0m in 1H19) came in better than our expectation (we projected a core net loss of – RM196.5m for the full-year), due to lower-than-expected CPO production cost. We lower FY20 core net loss forecast, and raise FY21-22 core net profit forecasts, mainly to account for slightly lower CPO production cost assumptions. We upgrade our rating on FGV to HOLD (from Sell earlier) with a higher SOP-derived TP of RM1.08 (from RM0.89 earlier) as we raise our EV/ha valuation on FGV’s upstream plantation segment, following the better-than-expected set of financial performance

Better-than-expected performance. FGV registered a core net profit of RM3.7m in 2Q20 (vs. core net losses of –RM226.2m in 1Q20 and –RM100.4m in 2Q19), bringing 1H20 core net loss to –RM222.5m (vs. core net loss of –RM156.0m in 1H19). The results came in better than our expectation (we projected a core net loss of –RM196.5m for the full-year), due to lower-than-expected CPO production cost. We note that consensus projected a full-year core net loss of –RM31.5m.

Exceptional items (EIs). During the quarter, we adjusted for RM16.9m worth of EIs. These include, amongst others, (i) RM27.8m revision on LLA, (ii) RM4.2m reversal of impairment of financial assets, (iii) RM4.3m commodity gains, (iv) RM0.1m reversal on PPE write off, (v) RM14.7m impairment loss on PPE, (vi) RM3.7m impairment loss on right-of-use assets and (vii) RM1.1m forex loss.

QoQ. 2Q20 returned to the black, with a core net profit of RM3.7m (from a core net loss of RM226.2m in 1Q20), thanks to a 67% increase in FFB output, slightly lower losses at sugar division, improved earnings contribution from logistics division and lower net finance cost, which altogether more than mitigated lower palm product prices.

YoY. 2Q20 performance turned around with a core net profit of RM3.7m (from a core net loss of –RM100.4m SPLY), due mainly to higher FFB production and palm product prices, as well as lower losses at sugar division, which altogether more than offset weaker performance at logistics division.

YTD. Despite the turnaround in 2Q20, core net loss widened to –RM222.5m in 1H20 (from core net loss of –RM156.0m in 1H19), and this was due mainly to weak FFB output registered in 1Q20, which has also resulted in higher unit production cost for CPO.

FFB output. FGV registered an 11.2% decline in FFB output (to 2.34m tonnes) in 7M20. Despite less-than-positive FFB output so far, management is keeping to its FFB output guidance of ~4.7m tonnes for FY20, as it expects FFB output pick up momentum in the next few months. In our forecast, we are assuming FFB output of 4.1m tonnes (~23% lower than management’s guidance).

Forecast. We lower our FY20 core net loss forecast to –RM135.4m (from a core net loss forecast of –RM196.5m earlier), while raising our FY21-22 core net profit forecasts by 30.7% and 20.0% respectively, mainly to account for slightly lower CPO production cost assumptions.

Upgrade to HOLD; TP: RM1.08. We upgrade our rating on FGV to HOLD (from Sell earlier) with a higher SOP-derived TP of RM1.08 (from RM0.89 earlier) as we raise our EV/ha valuation on FGV’s upstream plantation segment, following the better-thanexpected set of financial performance.

Source: Hong Leong Investment Bank Research - 25 Aug 2020