We recently visited Felda Global Ventures (FGV)’s plantation estates and downstream operations in Lahad Datu, Sabah and came back feeling optimistic about its long-term growth prospect. Recall that FGV’s overall plantation upstream operations have been strengthened in end-2013 with the acquisition of 100% stake in Pontian United Plantations (Pontian) for RM1.21b. Additionally, it was reported by the media that Pontian contributed 20% of the FGV’s plantation profit in the month of Feb-2014. Despite our positive view on the FGV’s upstream segment due to higher CPO prices YoY, we are not optimistic on the Group’s downstream division which has experienced higher loss before tax (LBT) in FY13. We maintain our FY14E and FY15E core earnings at RM925m and RM951m, respectively. Reiterate MARKET PERFORM on FGV with Target Price of RM4.75 based on unchanged 18.7x Fwd. PER valuation.

Upstream operations strengthened in 2013. We recently visited FGV’s plantation estates and its downstream operations in Lahad Datu, Sabah and came back feeling optimistic about its long-term growth prospects. Recall that FGV’s overall plantation upstream operation has been strengthened in end-2013 after the acquisition of 100% equity stake in Pontian United Plantations (Pontian) for RM1.21b. Note that the acquisition has effectively raised FGV total landbank size by 16,188 ha or 4% to 388,728 ha. This should bode well for FGV long-term earnings prospects in line with our long-term bullish view on CPO prices.

Good earnings contribution from Pontian at 20% in Feb-2014. According to Bernama, Pontian has already contributed 20% profit to FGV’s plantation operations in the month of Feb-2014. Note that this news from Bernama is related to a recent interview with FGV’s CEO, Mr. Mohd. Emir Mavani Abdullah in early April. We believe that the good earnings contribution from Pontian is driven by its strong FFB yield, which outperforms the overall FGV Group level. Note that in FY13, Pontian achieved FFB yield of 23.35 MT/ha (against FGV’s 19.59 MT/ha). We are positive on the news as the Pontian estates should help to improve overall FGV FFB yield slightly.

Also visited Sahabat plantation estate in Lahad Datu. We also visited another important plantation estate which belongs to FGV in Sabah. Named Felda Sahabat, this estate encompasses an area measuring 101,930ha or 26% of FGV Group’s total palm oil plantation landbank. During the trip, we visited: (i) plantation estate, (ii) palm oil mill, (iii) palm kernel crushing plant, (iv) refineries, and (v) biomass power plant.

However, downstream operations still in the red. Despite our positive view on the upstream segment, FGV’s downstream operations’ Loss Before Tax has widened to RM45m in FY13 (against RM12m in FY12). We gather that this is caused by negative margins from FGV’s local downstream activities and the extreme weather conditions in North America in 4Q13 which had adversely affected the Group’s downstream activities. While we expect some improvement in the downstream division, we believe it is likely to stay in the red in FY14.

Maintain MARKET PERFORM with unchanged Target Price of RM4.75. We maintain our FY14E and FY15E core earnings at RM925m and RM951m, respectively. Our valuation of RM4.75 is also maintained based on 18.7x Fwd. PER applied on CY14 EPS of 25.4 sen. The 18.7x Fwd. PER is based on mean valuation which we think is fair as the upside in the upstream division is neutralised by downstream division, which is expected to stay in the red in FY14.

Source: Kenanga