FGV’s 1H18 revenue fell by 17.5% yoy to RM7.04bn while core net profit dropped to RM8.6m (-93.4% yoy). Core earnings were below expectations, mainly due to a lower-than-expected contribution from the sugar and plantation businesses as well as higher-than-expected losses from its JV and associates. We are cutting our 2018-20E core EPS by 10-50% after the weak 1H18 results. In tandem with our earnings cuts, we are lowering our 12-month TP to RM1.50, still based on a 2019E PER of 25x. We maintain our HOLD call on the stock.

Higher Profit From Sugar Segment But a Decline in Plantation Segment

FGV Holdings (FGV) reported lower revenue of RM7.04bn (-17.5% yoy) due to lower contribution from the sugar and LSB (Logistics and Support Business) divisions, but partially offset by higher contribution from the plantation segment. Plantation segment revenue rose 27.4% yoy to RM5.4bn, while that for the sugar and LSB divisions fell yoy by 16% and 83.5%, respectively, to RM1.1bn and RM483.3m. For 1H18, FGV reported PBT of RM27.5m (-60.9% yoy), due to weaker results from the plantation division as well as share of loss from JV and associates; but this was partially mitigated by higher profit contribution from the sugar and LSB divisions. The plantation division was affected by lower CPO ASPs of RM2,447/MT in 1H18 (1H17: RM2,916/MT) and higher CPO production costs of RM1,811/MT (1H17: RM1,691/MT).

1H18 Core Net Profit at RM8.6m, Below Our Expectations

After excluding impairments, forex losses and other one-off items, FGV posted 1H18 core net profit of RM8.6m (-93.4% yoy). This was below our expectations, at only 5% of our going-in 2018E, and the variance was mainly due to lower-than-expected contribution at the plantation and sugar divisions and higher-than-expected losses at FGV’s JV and associates.

Lowering TP to RM1.50, Maintain HOLD Rating

We are cutting our 2018-20E core EPS for FGV by 10-50% after the weak 1H18 results, mainly to account for lower contribution from the sugar and plantation divisions as well as wider losses from FGV’s associates. In tandem with our lower earnings, we lower our 12-month TP for FGV to RM1.50 (from RM1.80 previously), based on an unchanged 25x PER applied to our core EPS for 2019E. Maintain HOLD on the stock.

Key Risks

Key upside/downside risks include: 1) a stronger/weaker economic growth leading to a higher/lower consumption of vegetable oils; 2) a sustained rebound/plunge in the CPO price; 3) higher/lower-thanexpected FFB and CPO production; and 4) changes in policies.

Source: Affin Hwang Research - 29 Aug 2018