Period  2Q14 / 1H14

Actual vs. Expectations Felda Global Ventures (FGV)’s 1H14 core net profit* (CNP) of RM330m is below expectations as it makes up only 44% of both the street’s FY14E CNP forecast of RM742m and ours of RM743m.

 Note that FGV’s FFB production in 1H14 was lower than expected at 2.37m MT or a decline of 3% YoY. This is lower than our earlier estimate of 10% FFB growth for FGV. Management attributed the low FFB volume to the dry season in 1Q14, which affected yield.

 In our CNP calculations, we have excluded the non-cash estimated Land Lease Agreement (LLA) of RM218m, LLA cash paid of RM171m and other one-off gain of RM13m.

Dividends  As expected, a 6.0 sen dividend was announced. We expect the full-year FY14E dividend to be 11.2 sen representing dividend yield of 2.9%.

Key Results Highlights YoY, 1H14 CNP increased 134% to RM330m as plantation division core PBT improved 70% YoY to RM501m as results of higher CPO prices of RM2619/MT (+15% YoY). The core PBT for plantation division is against the trend of lower reported PBT for plantation division. We have excluded FGV non-cash LLA gain in 1H13 and also non-cash LLA loss in 1H14.

 QoQ, 2Q14 CNP is up 17% to RM178m due to better performance from sugar (PBT +42% to RM111m) and MLO

(Manufacturing, Logistics and Others) division (PBT +39% to RM78m). Sugar division’s margin expanded as a result of lower raw sugar cost globally. MLO division’s PBT increased due to higher R&D income (likely to be the FFB from the research land) and higher quantity of fertiliser sold.

 These have more than offset lower earnings from plantation (PBT -17% to RM128m). Plantations earnings declined due to higher estate expenses and negative margin from the rubber processing business.

Outlook  Management believe that the market conditions and price of CPO are a challenge facing the plantation industry and FGV’s performance is likely to also toe the line. We share the same view and believe that FGV plantation division is likely to make losses if average CPO prices drop below RM2000/MT. Nevertheless, we believe that CPO prices should have already bottomed out and improve in 4Q14.

Change to Forecasts We have reduced FY14E CNP by 13% to RM650m after cutting FFB volume by 12% to 4.97m MT. FY15 CNP is trimmed by 9% to RM713m after lowering FFB volume by 9% to 5.48m MT.

Rating Maintain MARKET PERFORM

 Upside is limited due to low CPO prices currently. However, downside is also limited as it is already trading below its IPO price.

Valuation  We cut our Target Price to RM4.00 (from RM4.40) based on an unchanged 20.5x Fwd. PE on lower FY15E EPS of 19.5 sen (from 21.5 sen). Our 20.5x Fwd. PE is based on -2SD valuation as its FFB growth prospect is the lowest in the industry.

Risks to Our Call Lower-than-expected CPO prices and FFB volume.

 Lower-than-expected earnings from non-plantation divisions.

Source: Kenanga