Felda Global Ventures (FGV) hit the media recently with a series of news and articles on: (i) potential Tradewinds stake sale, (ii) potential cancellation of the Eagle High deal, (iii) continued efforts to restructure its Land Lease Agreement, and (iv) reduced priority on a target to operate 1.0m ha by 2020. Combined with +38% 2Q16 FFB production, we expect the positive news flow to buoy investors’ sentiment leading up to its 2Q16 results. We increase our valuation basis and TP to RM2.10 (from RM1.58), on better investors’ confidence and receding risks. Our MARKET PERFORM call is maintained.

Series of fortunate events. Recent news reports on FGV highlighted a few new developments on the company, including; (i) a potential stake acquisition by Tradewinds Group, (ii) potential cancellation of the Eagle High deal, (iii) continued exploration in restructuring its Land Lease Agreement (LLA), and (iv) reducing priority on a previous target to operate 1.0m ha of plantations by 2020. We think the first two items could lead to renewed investors’ interest in the company, while the last one is an indicator of the new management’s plan to focus on the basics by improving performance of existing assets. Meanwhile, we are neutral on the renegotiation of the LLA as this has been in the works for quite some time.

Eagle High deal on the back burner. The Star reported on 28-Jul-2016 that “an investment unit of Felda may sign an agreement for the acquisition of a significant stake in Indonesian planter Eagle High Plantations Tbk”, where representatives from Rajawali Group and Felda may be meeting in Jakarta this week to conclude the deal. The Star added that with Felda undertaking the transaction, “FGV does not have to participate in the investment” which we expect will ease the negative sentiment that has plagued FGV’s share price since the deal was proposed in Jun- 2015. As noted in our company update on 17-May-2016, we think the resolution of the Eagle High acquisition could be a potential re-rating catalyst for FGV.

Production pickup, but drought setbacks linger. In the May-2016 management briefing, management noted that 2Q16 production was likely to pick up strongly against the previous quarter by c.40%. Based on monthly production reports, FFB production has indeed improved by 38%, for 1H16 FFB production of 1.86m MT. This makes up 45% of our full-year FFB production forecast, roughly in line with the 3-year average of 47% for 1H production. Despite the strong pickup, 1H16 production remains lower against 1H15 by 12%, reflecting setbacks from the very weak production in 1Q16 due to weather impact. Meanwhile, we still expect full-year FFB production to decline by 10%, well below the sector average of +3% YoY.

Risks remain. While news reports are generally positive, we note that several key risks remain over the near- and long- term. In the short-term, we expect CPO prices to trend down in 3Q16, which could dampen sentiment across the sector. Over the long-term, we also note that FGV’s RSPO re-certification will likely take some time, with initial estimates of about 3 years. Meanwhile, FGV as remains the planter with the oldest average age among planters under our coverage at c.17 years compared to the sector average of 10 years.

Maintain MARKET PERFORM with higher TP of RM2.10 (from RM1.58) based on a higher Fwd. PBV of 1.2x applied to an unchanged average of FY16-17E BVPS of RM1.77. Our Fwd. PBV of 1.2x is based on -0.5SD valuation (previously -1.0SD valuation) as we believe the coming conclusion of the Eagle High deal and strong production improvement should strengthen investors’ confidence in the company. However, we maintain our negative valuation basis given negative YoY FFB production growth prospect and lack of RSPO credentials. With near-term optimism offset by long-term risks, we maintain our MARKET PERFORM view on the stock.

Source: Kenanga Research - 3 Aug 2016