FGV’s 9M20 core net loss of to -RM31.3m (vs. core net loss of RM104.9m SPLY) beat our expectation due to better-than-expected palm product prices and FFB output. We revise our FY20 projection to a core net profit forecast of RM46.2m (from a core net loss forecast of -RM135.4m earlier), to reflect higher palm product prices YTD and higher FFB output assumption. We raise FY21-22 core net profit forecasts by 8-10% to account for slightly higher FFB output and lower CPO production cost assumptions, while maintaining our FY21-22 average CPO price projection for now. We upgrade our rating on FGV to BUY (from Hold earlier) with a higher SOP-derived TP of RM1.39 (from RM1.08 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. 3Q20 core net profit of RM189.2m (vs. core net profits of RM5.7m in 2Q20 and RM51.0m in 3Q19) brought 9M20 core net loss to - RM31.3m (vs. core net loss of RM104.9m SPLY). The results beat our expectation (we projected a core net loss of -RM135.4m for the full year), due to better-than expected palm product prices and FFB output. We note that consensus projected a full-year net profit of RM6m.

Exceptional items (EI). During the quarter, we adjusted for RM52.3m worth of EIs, These include (i) RM20m revision on LLA assumptions, (ii) RM39.3m commodity gains, (iii) RM74.4m PPE impairment and write-off, (iv) RM8.0m reversal of impairment loss on right-of-use assets, (v) RM3.5m impairment of financial assets, and (vi) RM1.6m unrealised forex loss.

QoQ. Core net profit surged to RM189.2m in 3Q20 (from RM5.7m in 2Q20), boosted by (i) higher palm product prices and FFB output (which have in turn resulted in operating profit at plantation segment increasing by 494% to RM257.1m), (ii) lower losses at sugar segment (as a result of improved sales volume and profitability), and (iii) improved earnings at Logistics and other segments (in tandem with higher output at plantation segment).

YoY. Core net profit more than tripled to RM189.2m (from RM51.0m SPLY), boosted by significantly higher plantation earnings (arising from higher palm product prices and FFB output), reduced losses at sugar segment, and improved performance at logistics and other segment.

YTD. Core net loss narrowed to -RM31.3m in 3Q20 (from a core net loss of - RM262.4m SPLY, due mainly to significantly higher palm product prices and reduced losses at sugar segment, which more than mitigated a 5.6% decline in FFB output and higher CPO production cost.

FFB output. Management toned down its FFB output guidance for 2020 (from ~4.7m tonnes earlier) to 4.4-4.5m tonnes (vs. 4.45m tonnes in FY19), due mainly to less favourable weather condition. Moving to FY21, management is guiding an FFB output growth of 5-7%.

No notification from Felda (on LLA) yet. FGV has yet to receive any notification from Felda with regards to the termination of LLA at the time of writing, and neither the latter’s written notification in taking over its 68 mills (which is not part of the LLA). We understand that these mills have a combined book value of circa RM1bn, of which FGV has a 72% stake, and FGV will need to seek shareholders’ approval (if Felda’s acquisition of the mills materialises).

Forecast. We revise our FY20 projection to a core net profit forecast of RM46.2m (from a core net loss forecast of -RM135.4m earlier), to reflect higher palm product prices YTD and higher FFB output assumption (closer to management’s guidance). We raise FY21-22 core net profit forecasts by 8-10% to account for slightly higher FFB output and lower CPO production cost assumptions. Note that we are maintaining our FY21-22 average CPO price projection for now, pending a further review.

Upgrade to BUY; TP: RM1.39. We upgrade our rating on FGV to BUY (from Hold earlier) with a higher SOP-derived TP of RM1.39 (from RM1.08 earlier) as we raise our EV/ha valuation on FGV’s upstream plantation segment, following the better-than expected set of financial performance

Source: Hong Leong Investment Bank Research - 18 Nov 2020