• FGV recorded a core net profit of RM49m in 2Q20 vs. a core net loss of RM165.6m in 1Q20, underpinned by stronger profits from plantation and logistics divisions due to higher FFB production and lower production costs.
• We expect FGV’s earnings in 2H20 to be better mainly due to its plantation division as FFB and CPO production is expected to normalise after a slow start in early 2020 and demand to gradually recover as countries reopen after strict lockdowns in 1H20.
• We make no changes to FGV’s 2020-22E core earnings; maintain HOLD rating and TP of RM1.25.

Back to black in 2Q20 due to turnaround in plantation division

FGV Holdings (FGV) reported a stronger 2Q20 revenue of RM3.3bn (+18.4% qoq) and a PBT (which includes impairments and forex gain) of RM17.8m vs. a LBT of RM163.1m in 1Q20. EBITDA margin in 2Q20 increased by 6.4ppt qoq to 8.5% due mainly to better margin at the plantation division given the operational improvement. The plantation division showed a turnaround in profits due to higher FFB production, higher mills utilisation rate and lower production costs. FGV’s FFB production in 2Q20 increased by 66.9% qoq to 1.2m MT, but was partially offset by lower CPO ASP of RM2,309/MT (1Q20 CPO ASP: RM2,669/MT). The surge in FFB production was after a low base in 1Q20, adversely impacted by the lagged impact of dry weather conditions experienced in 2019. The logistics & others division also recorded a higher profit in tandem with higher FFB production, while the sugar division showed lower losses in 2Q20 due to lower opex. After excluding the one-off items, FGV recorded a core net profit of RM49m in 2Q20 vs. a core net loss of RM165.6m in 1Q20.

6M20 core net loss at RM116.7m

Meanwhile, FGV 6M20 revenue was lower by 7.3% yoy to RM6.1bn, due to lower contribution from plantation (-8%) and logistics & others (-32.2%) divisions, but partially offset by slightly higher revenue contribution from the sugar (+0.1%) division. FGV’s 6M20 LBT was higher at RM145.2m vs LBT of RM33.4m in 6M19, due to widening of losses in its plantation business (decrease in CPO sales volume but partially offset by higher CPO ASP). FGV’s 6M20 core net loss, after excluding one-off items, was higher by 9.3% yoy to RM116.7. We deem the results to be in-line as we expect 2H20 to be stronger underpinned by improvement in the plantation and sugar divisions

Maintain HOLD rating on FGV and TP at RM1.25

FGV’s plantation division profits in 2H20 are expected to be driven mainly from the continuous operational improvement, as we believe FFB and CPO production will continue to pick up as we enter the peak production period towards Oct/Nov but this could partially be offset by lower CPO prices in 2H20. We expect 2H20 FFB production to increase over 30% vs. 1H20. This coupled with higher mills utilisation rate should bring down the unit production costs. Also, we expect the sugar division’s losses to narrow in 2H20 on higher capacity utilisation at its Johor refinery, which should help to reduce production cost. Overall, we make no changes to our 2020-22E core EPS and our CPO ASP assumptions remain at RM2,350-2,550/MT. We maintain our HOLD rating on FGV with an unchanged TP of RM1.25, based on a PER of 33x on 2021E core EPS.

Key risks

Key upside/downside risks include: 1) stronger/weaker economic growth leading to a higher/lower consumption of vegetable oils; 2) a sustained rebound/plunge in CPO prices; 3) higher-/lower-than-expected FFB and CPO production; 4) stronger/weaker demand for sugar products; and 5) changes in policies.

Source: Affin Hwang Research - 24 Aug 2020