Period  4Q14/FY14

Actual vs. Expectations  Felda Global Ventures (FGV)’s FY14 core net profit* (CNP) of RM157m is sharply below expectations, making up only 37% and 36% of consensus and our expectation of RM421m and RM433m, respectively.

 The main culprit is the weaker-than-expected plantation segment PBT which declined 39% YoY to RM705m. In addition to lower FY14 FFB production (-4% to 4.9m MT), plantation segment PBT margin also declined YoY from 6% to 4%

 Nevertheless, we note that the downstream segment recorded QoQ improvement to LBT of RM22m (from LBT of RM117m) due to reversed losses from derivatives contracts in Canadian operations as previously highlighted.  In our CNP calculations, we have excluded the non-cash estimated Land Lease Agreement (LLA) of RM130m and other one-off gain of RM57m but included the LLA cash payment of RM336m.

Dividends  4.0 sen final dividend (implying 1.4% dividend yield) was proposed, which is below our estimate of 7.5 sen.

Key Results Highlights  YoY, FY14 CNP fell 11% to RM157m due to: (i) weaker plantation PBT which declined 39% to RM705m due to lower FFB production at 4.9m MT (-4%), and (ii) higher downstream LBT at RM125m from RM52m previously due to negative refining and crushing margins.

 QoQ, the company saw 4Q14 Core Net Loss (CNL) of RM91m as we stripped off the one-off gain in LLA Liability of RM144m and other one-offs at RM76m, then added back LLA cash payment of RM79m. Despite improved plantation earnings as a result of the gain in LLA Liability, this was partly offset by lower FFB processed of 1.2m MT (-10%) and lower CPO prices at RM2,154/MT (-7%). However, the downstream division saw fewer losses due to positive margin from RBD products and reversal of mark-to-market losses on forward contracts. The Sugar business improved QoQ due to better sales volume and higher selling price in its industrial and export segments.

Outlook  In the plantation division, we expect CPO prices to average RM2,200/MT in FY15 as we think CPO prices will weaken in 2H15 due to higher production, the weak Ringgit and low crude oil prices.

 Management expects refining margins to remain weak in the shortterm, although with the recent switch to toll manufacturing for FGV’s refiners as mentioned in our previous report, we think the downstream side may see some improvement going forward.

Change to Forecasts  We trim our FY15E CNP by 4% to RM393m as we tweak our FFB growth expectation down to -1.9% (from -0.2%) while we adjust downstream margins slightly higher to 1.3% (from 1.0%) to account for the weaker upstream and reorganized downstream segments. We may consider further trimming earnings pending clarity from management.

Rating Downgrade to UNDERPERFORM  We downgrade FGV to UNDERPERFORM as we think that the stock has done well with YTD returns of 35% vs. 3% for other planters under our coverage. While we have recognized their reorganization efforts (refer to our FGV Company Update published 23-Feb), we believe investors are likely to take a cue from the disappointing results to take profit on the counter.

Valuation  We adjust our TP to RM2.85 (from RM2.97) based on an unchanged 26.5x PE on slightly lower FY15E EPS of 11.1 sen (previously 11.2 sen). We are comfortable with our valuation basis of -1.5SD given the low FFB growth potential and lacklustre downstream outlook as we ascribe mainly mean valuations for planters with average or higher FFB yields.

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

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

Source: Kenanga