Felda Global Ventures (FGV) has withdrawn the RSPO-P&C certificates of 58 mills in Malaysia effective yesterday. We were not surprised as the move had been brought up by the media earlier. As per our comment dated 3rd May 2016, we are negative on the news due to the likely loss of CSPO premium and high-end customers in Europe or America. Maintain UNDERPERFORM on FGV with lower TP of RM1.21 (from RM1.28) after lowering FY16-17E earnings by 7-10%.

Withdraws mills RSPO certification. FGV announced that FGV and FELDA Group (FELDA) had withdrawn the RSPO-P&C certificates of 58 complexes located throughout Malaysia effective 3rd May 2016. FELDA remains a member of RSPO and the exercise does not affect its RSPO Supply Chain Certification System (SCCS) certificate of its kernel crushing plants and downstream refineries. FELDA is currently addressing all sustainability issues along the supply chain. This exercise allows a more inclusive certification between commercially managed plantations by FGV and FELDA smallholders.

To lose CSPO premium. We were not surprised by the announcement as the move had been brought up by the media earlier. Although we understand that FGV plans to recertify its mills within three years, the withdrawal will result in the temporary loss of FGV’s CSPO price premium. Recall that 47.4% or 1.47m metric tons (MT) of its CPO production are RSPO-certified. Assuming the loss of CSPO premium at about RM50/MT, we estimate a bottom-line impact of about RM18.0m.

Potential loss of business. The withdrawal of FGV’s mill certificates could also lead to loss of high-end business, particularly in Europe or America. We note that IOICORP’s recent suspension resulted in loss of business from several MNC clients, including Unilever, Proctor & Gamble and Colgate-Palmolive, among others. We think the same could be in store for FGV, although the earnings impact should be less severe given its smaller revenue base from Europe and US (7%) compared to IOICORP (51%).

Lowering FY16-17E earnings by 7-10%. After accounting for the loss of CSPO premium, we reduce our FY16-17E earnings by 7-10% to RM210-169m.

Reiterate UNDERPERFORM with lower TP of RM1.21 (from RM1.28) post-earnings downgrade. Our TP of RM1.21 is based on an unchanged 20.5x Fwd. PER applied to lower FY16E EPS of 5.8 sen (from 6.3 sen). We maintain our Fwd. PER of 20.5x based on -2.0SD valuation. We think our valuation basis and UNDERPERFORM call are justified by FGV’s negative FFB growth, higher risk on its Trading division, as well as potential sentiment impact on its ongoing Eagle High deal and possible loss of MNC clientele due to the certificate withdrawal.

Source: Kenanga Research - 4 May 2016