Period

1Q15

Actual vs. Expectations

Felda Global Ventures (FGV)’s 1Q15 core net loss* (CNL) at RM44m fell woefully and short of both consensus expectation and ours of RM416m and RM393m, respectively. This is the third consecutive quarter of disappointments. The CNL was mainly due to poor plantation segment earnings, which saw LBT of RM1.6m on weak CPO prices (-12% YoY to RM2279/MT) and a sharp drop in FFB production (-20% YoY to 930k MT) which resulted in poorer operating margins at 1.8% vs. 1Q14’s 6.5%.

Dividends

No dividend announced, as expected.

Key Results Highlights

Due to an adjustment in reporting segments, some segment data are unavailable for 4Q14. For details, see the Segmental Breakdown table on Page 2.

YoY, 1Q15 saw CNL of RM44m mainly due to poor Plantation performance. The Palm Plantation (upstream) division saw LBT of RM1.6m on weak CPO prices and lower FFB production as highlighted above. The Palm Downstream division saw LBT at RM44m due to poor sales volume and lower crush margins (- 33% to CAD30/MT) in its Canadian business.

QoQ, the company improved on its CNL (from RM91m to RM44m) on lower LLA charges (from –RM108m to RM55m), although operationally, FGV was weaker in its Plantation upstream and downstream segments as outlined above.

Outlook

In the plantation division, we expect CPO prices to average RM2,200/MT in FY15, which is slightly below management’s FY15E expected CPO price range of RM2,250/MTRM2,400/ MT.

Management expects refining margins to remain weak in the short-term, 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 reduce our FY15-16E CNPs by 22-15% to RM306m- RM364m in light of the weak 1Q15 earnings. We revise down our FY15-16E FFB growth expectations to -6% and -5% from - 2% and +5% to account for poor 1Q15 FFB production and FGV’s aggressive replanting efforts, which reduce the overall harvestable area.

Rating

Downgrade to UNDERPERFORM (from MARKET PERFORM)

We downgrade FGV to UNDERPERFORM from MARKET PERFORM in view of the negative FFB growth against the sector average growth of 5%. Although the switch to a toll manufacturing system should lift the downstream segment from its current loss-making position, we think that the lacklustre CPO price expectations and FGV’s higher cost base (c.RM2100/MT against the sector average of c.RM1400/MT) may result in further earnings risks.

Valuation

We lower our TP to RM1.88 (from RM2.21) based on an unchanged 20.5x PE. While we partly roll forward from FY15 to an average FY15-16E core EPS of 9.2 sen (previously 10.8 sen), our TP is lowered due to the earnings cut. We think our valuation basis of -2.0SD is justified due to the negative FFB growth outlook and limited earnings upside. Our valuation basis also incorporates our concern that FGV may be removed from the FBMKLCI in the next review as its market cap has fallen to RM7.3b based on its last closing price of RM2.01.

Risks to Our Call

Higher-than-expected CPO prices and FFB volume.

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

Source: Kenanga Research - 27 May 2015