Period  1Q14

Actual vs. Expectations Felda Global Ventures (FGV)’s 1Q14 core net profit* (CNP) of RM185m is within expectations as it makes up 22% of the street’s FY14E CNP of RM845m and 20% of our estimate of RM925m.

 In our CNP calculation, we have excluded the non-cash estimated Land Lease Agreement (LLA) adjustment gain of RM89m, reversal of Felda Iffco Inc. impairment, which is part of Felda North America JV (RM29m) and unrealized forex gain at Trurich (RM19m).

Dividends  As expected, no dividend was announced in 1Q.

Key Results Highlights Note that 1Q14 CNP is guided by the management but 1Q13 CNP and 4Q13 CNP are based on our own estimates.

 YoY, 1Q14 CNP is flat (-1% to RM185m). Although the plantation division PBT is up 88% to RM155m, this is neutralised by downstream division which slipped into loss before tax of RM4m (against PBT of RM17m in 1Q13). Additionally, lower earning was incurred in sugar (-12% to RM79m) division. Plantation division benefited from higher CPO prices (+14% to RM2584/MT). However, downstream division turned into losses as refining margin turned negative which we think could be caused by higher feedstock cost. Lastly, sugar division suffered lower sales volume in the domestic market which we think is due to increase in sugar prices.

 QoQ, 1Q14 CNP turned into profitability of RM185m against 4Q13’s estimated Core Net Loss of RM89m. We believe that the plantation division has benefited from higher CPO prices (+7% to RM2584/MT). Based on our estimate, FGV plantation division all-in cost per MT is around RM2450/MT in 4Q13 and hence the division incurred Core Net Loss when CPO price was at RM2425/MT at that time. Despite the reported RM315m PBT in plantation division, we believe that this division is making Core Net Loss of RM10m after excluding Land Lease Agreement Gain (RM260m) and Negative Goodwill Arising from Felda Holdings Berhad Acquisition (RM65m).

Outlook  Upstream division should remain profitable as long as CPO prices stay above RM2450/MT. However, its downstream division may take a longer time to turn around as it still incurred LBT of RM4m in 1Q14.

Change to Forecasts We maintain core net profit estimate of RM925m and RM951m for FY14E and FY15E, respectively.

 However, we have adjusted down our CNP to RM359m for FY13 as the management gives its guidance on CNP for the first time.

Rating Maintain MARKET PERFORM

 The bright prospect from the plantation division is neutralised by concerns over its downstream operations.

Valuation  We maintain our Target Price of RM4.75 based on an unchanged 18.7x Fwd. PE on CY14E EPS of 25.4 sen.

Risks to Our Call Lower-than-expected CPO prices.

 Lower-than-expected margin for downstream division.

Source: Kenanga