FGV’s 1H16 Core Net Loss (CNL*) at RM47m is below consensus (RM157m) and our CNP forecast (RM121m) as FFB production remained slow at 45% of full-year while Sugar earnings halved YoY-Ytd on higher raw sugar cost. No dividends announced, as expected. FY16-17E earnings cut by 32-12% to RM82-131m. However, we maintain our MARKET PERFORM call with unchanged TP of RM2.10 (based on 1.2x PBV) as we expect a stronger 2H in line with potential pickups in production.

1H16 Core Net Loss (CNL*) of RM47m at Felda Global Ventures (FGV) missed consensus’ Core Net Profit (CNP) forecast of RM157m and our CNP forecast of RM121m. This came as FFB production remained slow at 45% of our 4.38m metric ton (MT) forecast. Sugar earnings were also weaker, halved to RM106m PBT due to higher raw sugar prices and a weaker ringgit.

Trying to catch up. YoY-Ytd, CNL increased by 68% to RM47m as Upstream PBT was halved due to weaker FFB volume (-14%) resulting in higher costs per ton (RM1,736/MT ex-mill, +18%) and thinner margins (5% from 9%). Sugar PBT also halved as raw sugar prices rose to USD¢15.7/pound (lbs) (+19%) or 64.5 sen/lbs (+34% higher due to weaker RM). QoQ, CNP at RM13m reversed from CNL of RM60m as Upstream PBT turned around on a 38% jump in FFB volume and 12% increase in CPO prices. However, Sugar earnings declined 41% as raw sugar rose to USD¢17.0/lbs (+18%) or 68.3 sen/lbs (+15%).

Plantation improvement limited by Sugar business. Management expects plantation earnings to continue improving as they see 2H16 production making up 55-60% of the full-year. With historical 2H production averaging 53%, we maintain our expectation of 55% production in 2H16, which implies an FY16- 17E growth of -10% and +6%. However, on the Sugar side, raw sugar prices continued to increase with year-to-date (YTD) prices at USD¢16.7/lbs (+33% vs. 9M15) or 68.3 sen/lbs (+43% vs 9M15). Hence, we think 3Q16 sugar performance could be flat at best, which could limit earnings improvement from plantations.

Cut FY16-17E CNP by 32-12% to RM82-131m as we reduce Sugar earnings outlook after revising up raw Sugar prices and USD/MYR expectations closer to current levels.

Maintain MARKET PERFORM and TP of RM2.10. Our TP is maintained at RM2.10 based on an unchanged PBV of 1.2x while we roll forward our valuation base year to FY17E (from average FY16-17E) with BVPS maintained at RM1.77. Our PBV is maintained at -0.5SD which is in line with other planters registering below the sector average FFB growth rate (+2%). However, we think near-term share price downside is limited, in view of supportive CPO prices (3Q16 average c.RM2,500/MT) and rising production expectations in 2H16. Hence, we maintain our MARKET PERFORM call on FGV.

Source: Kenanga Research - 30 Aug 2016