Period

2Q15/1H15

Actual vs. Expectations

Felda Global Ventures (FGV)’s 1H15 core net loss* (CNL) at RM28m came in way below both consensus and our net profit expectations of RM266m and RM308m, respectively. This is the fourth straight quarter of earnings disappointment, as better 2Q15 CNP of RM16m failed to offset weak CPO prices (-14% to RM2,263/MT) and negative FFB growth (-9% to 2.15m MT).

Dividends

No dividend announced, as expected.

Key Results Highlights

Due to an adjustment in reporting segments, some segment data are not directly comparable. For details, see the Segmental Breakdown table on Page 2.

YoY, 1H15 saw CNL at RM28m due to weak Palm Plantation segment performance, as lower CPO prices (- 14% to RM2,263/MT) was compounded by lower YTD FFB production (-9% to 2.15m MT). The Palm Downstream segment saw LBT of RM7.2m due to continued weak volume in the US market and lower kernel crushing margin due to lower FFB volume. This was insufficient to negate its already relatively high fixed costs.

QoQ, the company turned profitable with CNP of RM16m as Palm Plantation PBT reversed to RM94m on sharply higher FFB production (+31% to 1.22m MT) offsetting slightly lower CPO prices (-1% to RM2,251/MT). Its Sugar business also recorded improved earnings (+23% to RM114m) due to higher festive demand. However, the Trading, Manufacturing and Logistics (TML) segment only broke even due to low trading margins.

Outlook

Management does not expect any substantial rebound/upswing in CPO prices in the second half of the year. We concur with management as we expect FY15E CPO prices to average RM2,200/MT, close to year-to-date (YTD) average of RM2,199/MT.

In the downstream side, we expect refining margins to improve heading into the peak production season, while the impending disposal of their North American business may help turn around segment losses.

Change to Forecasts

We lower our FY15-16E CNP by 23%-34% to RM236m- RM259m to incorporate higher estate cost and lower trading margins expectations.

Rating

Maintain MARKET PERFORM

We maintain our MARKET PERFORM recommendation in view of the steep decline in share prices to below FY15E Book Value (RM1.77/share) as well as potential gain on future disposals. However, weak near-term sentiment could limit upside.

Valuation

We lower our TP to RM1.24 (from RM1.75) based on an unchanged 18.2x PE on lower core EPS of 6.8 sen (previously 9.6 sen). Our target PER is based on -2.25SD which we think is justified by the negative FFB growth outlook (-5% YoY to 4.72m MT) and concerns over potential share dilution and increased gearing should its Eagle High’s acquisition be completed.

Risks to Our Call

Lower-than-expected CPO prices and FFB volume.

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

Source: Kenanga Research - 25 Aug 2015