News    Felda Global Ventures (“FGV”) announced that it had terminated its joint venture (“JV”) with Bunge Ventures Canada LP (“Bunge”). Recall that the FGV-Bunge JV was originally a setup for the soybean and canola business in Canada with FGV collecting tolling fees from Bunge based on the latter’s usage of FGV’s downstream facilities.

Post the JV termination, FGV will now be involved in the commercial operation of the business (including the crushing and processing of soybean and canola into refined products). Accordingly, FGV will now assume the market risk of the soybean and canola purchasing and hedging. This means FGV will start to recognise its revenue and cost of sales from the soybean and canola downstream business.

We gather that the JV will terminate on 31 Aug 2013 with the intent of dissolving the joint venture entity by 30 Nov 2013. At this juncture, FGV does not expect any material impacts on its FY13 earnings resulting from the JV termination. However a further accounting assessment will be made on the final effective dissolution date stated above.

Comments    We are neutral on the news. On the positive side, absolute control over the business in Canada should lead to a higher utilisation rate of its facility. However, FGV will now need to take on the market risk of soybean and canola raw material purchasing (in which the margins may be volatile).

Outlook   Current low CPO prices should keep FGV’s share price upside limited. However, its downside also appears to be limited as the share price is close to its IPO price of RM4.55.

Forecast   We believe the news is immaterial to FY13E-FY14E earnings. Hence, we maintain our FY13E-FY14E core earnings of RM723m-RM895m. Our key assumptions are FY13E-FY14E CPO prices of RM2500-RM2700 per mt.

Rating    Maintain MARKET PERFORM

Valuation    Maintaining our TP of RM4.60 based on an unchanged 18.7x Fwd. PER on CY14E EPS of 24.5 sen.

Risks   Lower than expected CPO prices. 

Source: Kenanga