FGV’s 9M18 revenue fell by 19.2% yoy to RM10.2bn and it recorded a core net loss of RM50.8m. This was below expectations, mainly due to a lower-than-expected contribution from the sugar and plantation business as well as higher-than-expected losses from its JV and associates. We are now forecasting a core net loss of RM75m in 2018 and we cut our 2019-20 core EPS forecasts by 41.2%/39.2% after the weak 9M18 results. Thus, our 12-month TP is lowered to RM0.88 (from RM1.50), based on an unchanged 25x PER applied to our core EPS for 2019E. Nonetheless, we maintain our HOLD rating on valuation.

9M18 Results Below Expectations

FGV Holdings (FGV) reported a 9M18 revenue of RM10.2bn (-19.2% yoy) attributable to lower contribution from the sugar and LSB (Logistics and Support Business) divisions, although this was partially offset by higher contribution from the plantation division. The plantation division’s revenue rose by 22.5% yoy to RM7.8bn, while that of the sugar and LSB divisions fell yoy by 15.7% and 83.4%, respectively, to RM1.7bn and RM709.7m. For 9M18, FGV reported a LBT of RM883.7m vs. a PBT of RM188.3m in 9M17, due to weaker earnings from the plantation division, impairments of intangible assets and PPE as well as its share of losses 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 a lower CPO ASP of RM2,371/MT in 9M18 (9M17: RM2,820/MT) and higher CPO production cost of RM1,800/MT (9M17: RM1,631/MT). After excluding impairments, forex gains and other one-off items, FGV recorded a core net loss of RM50.8m in 9M18 vs. a core net profit of RM215.2m. This was below expectations (our earlier forecast was for a core net profit of RM81m for 2018), mainly due to a lower-than-expected contribution from the plantation and sugar division as well as higher-than-expected losses from FGV’s JV and associates.

Weaker Sequentially, Core Net Loss of RM59.5m in 3Q18

FGV’s 3Q18 revenue declined by 7.1% qoq to RM3.2bn and it reported a LBT of RM911.1m (2Q18 PBT: RM1.3m). This was attributable to losses incurred in the plantation sector due to lower CPO prices, a higher share of JV losses and impairment of intangible assets and PPE. After excluding impairments, forex losses and other one-off items, FGV posted a core net loss of RM59.5m, widening from a core net loss of RM4.7m in 2Q18.

Transformation plan

In October 2018, FGV embarked on a new transformation plan. FGV has identified several areas for improvement and teams are concurrently working to restore the operational integrity of the plantations. In the immediate turnaround plan, steps for the next 3-6 months include a full review of the harvesting, evacuation and logistics processes to enhance the implementation of structural block harvesting systems and good farming practices, in order to increase mill utilisation to reduce cost, and improve efficiency and quality. We believe the transformation plan should help improve FGV’s productivity and cost management going forward. We are cautiously optimistic given a similar turnaround strategy introduced in early 2017.

Lowering TP to RM0.88, Maintaining HOLD Rating

We are now forecasting a core net loss of RM75m in 2018E and we cut our 2019-20 core EPS forecasts by 41.2%/39.2% after the weak 9M18 results, mainly to account for lower contribution from the sugar and plantation divisions. In tandem with our lower earnings forecasts, we reduce our TP for FGV to RM0.88 (from RM1.50 previously), based on an unchanged 25x PER applied to our core EPS for 2019E. We maintain our HOLD rating on the stock on valuation grounds.

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 Nov 2018