Felda Global Ventures (FGV)’s 3M16 Core Net Loss (CNL*) at RM60m missed both consensus (RM209m) and our (RM210m) Core Net Profit (CNP) forecasts on weak FFB production. No dividends announced, as expected. FY16-17E earnings cut by 42-12%. Nevertheless, we upgrade FGV to MARKET PERFORM with higher TP of RM1.40 (from RM1.21) as its share price has corrected near to NTA/share (RM1.34) indicating that most negatives could have priced-in by the market.

Another loss-making quarter. 1Q16 CNL at RM60m missed both consensus and our forecasts of CNP at RM209m and RM210m, respectively. This was mainly due to weaker FFB volume at 781k MT, making up only 18% of our FY16E expected volume. Marginal year-onyear (YoY) CPO price increase (+1% to RM2,303/MT) and better quarteron- quarter (QoQ) prices (+7%) failed to offset poor volumes.

Hit by soft FFB volume. 1Q16 CNL increased YoY by 37% and fell from 4Q15 CNP of RM13m, as FFB volume weakened (-16% YoY; -33% QoQ) resulting in Plantation Upstream LBT of RM101m, well below 1Q15’s LBT of RM2m and 4Q15’s PBT of RM225m. Downstream PBT at RM2m was stronger YoY against 1Q15’s LBT of RM22m due to the switch to the tolling system, but weaker against 4Q15 (-62%) on lower sales volume in China. Meanwhile, its Trading division saw 11% YoY improvement to RM18m, and reversed its 4Q15 LBT of RM14m largely on unrealised forex gains. Meanwhile, Sugar PBT was weaker at -28% YoY and -38% QoQ on higher raw sugar prices and unrealised forex loss.

Production to pick up in 2Q-3Q16. Management mentioned that 2Q16 production is likely to recover strongly, with a projected production pickup of 40% against 1Q16. Based on 2015 trends, we agree that this is possible and expect 55% of full-year production to come in within 2Q- 3Q16. However, the setback in 1Q16 FFB volume prompts us to adjust our FY16E and FY17E FFB growth prospect to -13% and +6%, from -6% and +5%.

Cut FY16-17E CNP by 42-12% to RM121-149m. We reduce our FFB growth outlook as outlined above, and also adjust production costs slightly lower due to lower volume. All-in, we expect FY16-17E CNP to come in at RM121-149m, or 42-12% lower than our previous forecasts.

But upgrade to MARKET PERFORM with higher TP of RM1.40 (from RM1.21). We upgrade our TP to RM1.40 as we: (i) switch our valuation method to Price to Book Value (PBV) of 0.80x in light of FGV’s high earnings volatility (i.e. CNL in 5 of the last 10 quarters), and (ii) roll forward our valuation base year to 1H17 BVPS of RM1.77. Our previous valuation method was Fwd. PER of 21.0x applied to FY16E EPS of 5.8 sen. We apply a higher valuation basis of -1.5SD (from -2.0SD) as we believe that the recent share price slide had largely priced in negatives from their RSPO withdrawal and ongoing Eagle High negotiations. The strong near-term production pickup could also improve investor confidence going forward. Finally, we note that FGV is currently trading at its FY16E NTA/share of RM1.34, which should translate to lower downside risk. As a result, we upgrade our call to MARKET PERFORM. 

Source: Kenanga Research - 25 May 2016