Period

3Q15/9M15

Actual vs. Expectations

Felda Global Ventures (FGV)’s 9M15 core net loss (CNL*) at RM193m is well below consensus CNP (RM172m) and our CNP forecast (RM236m). This is the fifth straight quarter of disappointment due to its weak Trading division (RM80m LBT), lower CPO prices (-11% to RM2,235/metric ton (MT)) and weaker FFB growth (-7% to 3.46m MT).

CNL was also impacted by higher tax rate (58%) due to deferred taxes, and minority interest payments (RM137m) to MSM shareholders.

Dividends

Surprisingly, a 2.0 sen dividend was announced, making up 36% of our original FY15E DPS of 5.6 sen. Nevertheless, we deem this in line as FGV tends to pay another dividend in 4Q.

Key Results Highlights

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

YoY, 9M15 CNL at RM193m was mainly due to its Trading division LBT (RM80m) on net forex loss of RM74m (partly realised). Upstream PBT also dropped 75% to RM124m as CPO prices fell 11% and FFB production declined 7%. We think minority interest payments of RM137m, mostly for MSM, further contributed to the losses.

QoQ, FGV reversed into the red with CNL of RM165m on Trading division’s LBT (RM96m) due to forex losses, while Upstream PBT fell 67% to RM31m mainly due to higher LLA fair value charges (+114% to RM108m) despite flat CPO prices (-1% to RM2,251/MT) and higher FFB production (+7% to 1.31m). Tax payments arising from deferred taxes as well as minority interest payments also increased CNL.

Outlook

Management believes CPO prices could appreciate towards RM2,600/MT by 1H16. We concur and think this should contribute to a reversal in FY16. However, substantial YTD losses are unlikely to be reversed by end-FY15, thus limiting short-term upside.

Downstream segment should remain profitable going forward post-disposal of their loss-making American assets, as refineries are now operating as toll manufacturers. However, margin risk is shifted into the Trading division, where volatile earnings are likely to persist.

Change to Forecasts

In light of the disappointing 9M15 results we slashed our FY15-16E CNP by 93-9% to RM16-261m as we raise FY15E effective tax rate to 50% and cut FY15-16E Trading margins to -5.0-0.4% (previously 1.0-1.5%).

We also raise FY15E dividend payout ratio to 108% (from 63%), closer to the 3-year average of 99%, for FY15E NDPS of 3.0 sen.

Rating

Maintain UNDERPERFORM

We reiterate our UNDERPERFORM rating due to the poor FY15E outlook, although long-term outlook should improve on expected CPO price recovery.

Valuation

No change to our TP (RM1.30) based on an unchanged 18.2x PER while we roll forward our valuation base year to FY16E (from average FY15-16E) for updated EPS of 7.2 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 is completed.

Risks to Our Call

Higher-than-expected CPO prices and FFB volume.

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

Source: Kenanga Research - 27 Nov 2015