FGV’s 2019 revenue fell by 1.5% yoy to RM13.3bn, but it recorded a narrower net loss of RM242.2m, partly attributable to lower losses from its sugar division and lower impairments. FGV reported a core net profit of RM47.5m in 2019 (vs. a core net loss of RM79.7m in 2018), which was above our expectation partly due to better a share of results from JVs and lower taxes. We tweak our 2020-21E core EPS lower by 3-5%, mainly to account for the lower contribution from the sugar division due to the challenging environment. Nevertheless, we expect FGV’s earnings to continue to improve going forward as its transformation plans bear fruit, and on better CPO prices. Although we are lowering our TP to RM1.30, we upgrade the stock to BUY from Hold given the potential upside of 14% to our revised TP following the recent share-price correction.

Better Performance Sequentially in 4Q19

Sequentially, FGV Holdings’ (FGV) 4Q19 revenue declined by 11.1% qoq to RM3.15bn, but it reported a PBT of RM46.1m vs. a LBT of RM363m in 3Q19. The qoq improvement in PBT was partly due to better performance from the plantation division coupled with lower losses from the sugar business and lower impairments done in 4Q19. After excluding for one-off items, FGV posted a core net profit of RM115.4m, up >100% qoq.

Narrower Net Loss in 2019 Due to Lower Impairments

FGV reported a slightly lower 2019 revenue of RM13.26bn (-1.5% yoy), due to a decline in revenue contributions from its sugar and logistics & others businesses, which declined by 8.9% and 24.9% yoy, respectively, to RM2bn and RM353.8m. Meanwhile, the plantation division’s revenue increased by 1.2% yoy to RM10.9bn, partly due to a better contribution from the downstream sub-segment. FGV’s upstream plantation division was affected by a lower CPO ASP of RM2,021/MT in 2019 (2018: RM2,282/MT), but this was partially offset by higher CPO production of 9% to 3.07m MT. FGV posted a LBT (which includes impairments and forex gain) of RM350.3m in 2019 vs. a LBT of RM1.02bn in 2018. FGV posted a narrower net loss of RM242.2m as compared to a RM1.08bn net loss in 2018, due to lower impairments done in 2019. After excluding the one-off items, FGV recorded a core net profit of RM47.5m in 2019 vs. a core net loss of RM79.7m in 2018. This was above our expectation, partly due a better-than-expected contribution from its share of results from JVs and lower taxes. Also, FGV has declared a better-than-expected DPS of 2 sen for 2019.

Upgrade to BUY Rating on Recent Price Correction, TP at RM1.30

We have updated our numbers and adjusted lower our earnings for 2020- 21E by 3-5%, mainly to take into account a lower contribution from its sugar division due to the challenging operating environment with its new Johor refinery. Our TP is lowered to RM1.30, based on an unchanged PER of 32x on 2020E core EPS. We upgrade the stock to BUY from Hold given the potential upside of 14% to our new TP following the recent share-price correction. We expect FGV’s earnings to continue to improve going forward as its transformation plans bear fruit, and through better CPO prices in 2020E. We note that FGV has managed to reduce its oil-palm average age to 13.2 years in 2019 from 16.3 years in 2012, which should benefit the group in terms of increasing the prime age hectarage and better FFB yield.

Key Risks

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

Source: Affin Hwang Research - 2 Mar 2020