Period  3Q14/9M14

Actual vs. Expectations Felda Global Ventures (FGV)’s 9M14 core net profit* (CNP) of RM248m is below expectations as it makes up only 44% of the street’s FY14E CNP forecast of RM543m and 38% of ours (RM650m).

 Key culprit is the unexpected Loss Before Tax (LBT) amounting to RM103m in the Downstream division. We gather that this is mainly caused by unrealized losses in commodity contracts of RM39m in FGV’s Canadian business as well as negative margin suffered in its palm oil refinery sub-division. Despite being categorised as “unrealized losses”, we consider it as core losses as it is part of the business risk for downstream operations.

 Additionally, CPO prices in 3Q14 were lower-thanexpected at RM2,317/MT (against our expectation of RM2,500/MT) due to lower-than-expected soybean oil (SBO) prices caused by bumper soybean crop in the United States.

 In our CNP calculations, we have excluded the noncash estimated Land Lease Agreement (LLA) of RM238m and other one-off gain of RM19m and then included back the LLA cash payment of RM257m.

Dividends  None as expected.

Key Results Highlights YoY, 9M14 CNP increased 118% to RM248m as plantation division core PBT improved 179% YoY to RM410m as results of higher CPO prices of RM2,509/MT (+9% YoY). Despite the small increase in CPO prices, impact on plantation division earnings is huge for FGV due to its higher cost base. For 9M14 core PBT calculations, we have excluded the non-cash estimated Land Lease Agreement (LLA) of RM238m and then included back the LLA cash payment of RM257m. For 9M13 core PBT calculation, we have excluded the non-cash estimated Land Lease Agreement (LLA) gain of RM102m and included back the LLA cash payment of RM245m. Despite good performance from plantation division, higher losses of RM103m in Downstream division pulled down the overall growth.

 QoQ, 3Q14 CNP tumbled 98% to RM3m due to RM117m losses in the Downstream division due to reason stated above.

Outlook  FGV expects CPO price to rise moderately in the shortterm up to 1Q15 based on the extension of CPO export duties exemption till end-2014 and renewed B7 biodiesel mandate. This should bode well for its plantation division, although we believe that upside to CPO prices should remain below RM2,500/MT.

 Management is silent on the downstream division outlook, but we think it will be challenging this year after the RM103m LBT in 9M14.

Change to Forecasts We have slashed FY14E CNP by 34% to RM433m after changing our downstream margin to negative 1.5% (from 0.4% previously) and reducing CPO prices assumption to RM2,400/MT (from RM2500/MT). FY15 CNP is Under Review at this juncture pending new CPO price estimate. Our last estimate was RM2,500/MT for FY15.

Source: Kenanga