9M17 Core Net Loss (CNL*) at RM80m remains below consensus’ CNP (RM118m) and our forecast (RM95m) as Sugar PBT was halved on higher raw sugar prices (+37% YoY) and higher USD/MYR (+8% YoY). No dividend announced, as expected. FY16-17E earnings slashed 105- 46% with FY16E CNL forecasted as per management guidance of full-year loss. Maintain MARKET PERFORM with lower TP of RM1.90 (based on lower PBV of 1.1x).

9M16 seeing red. Felda Global Ventures (FGV)’ 9M16 Core Net Loss of RM80m missed both consensus’ Core Net Profit expectation of RM118m and ours at RM95m. This was chiefly due to weaker Sugar contribution as margins compressed on higher raw sugar prices (+37% YoY) and stronger USD (USDMYR +8% YoY). 9M16 FFB production was in line at 75% of our 3.98m MT forecast. No dividend was announced, as expected.

Sugar and Downstream dragged. YoY, CNL was trimmed by 59% to RM80m partly due to lower taxes (-62%). On a PBT level, earnings dropped by 93% on lower Sugar contribution, as mentioned above. This came despite Upstream improvement (+33%), as better CPO prices (+10% to RM2,458/MT) offset weaker volumes (-14% to 2.98m MT). Meanwhile, Downstream saw LBT of RM7m (from PBT of RM7m) due to higher PK prices and administrative costs. The Trading division reversed losses to post RM28m PBT on lower forex losses. QoQ saw a reversal into losses due to surprisingly weaker Upstream performance (-38%) on the back of lower CPO prices (-4%) and higher LLA fair value charge. Downstream also saw losses (RM14m) on softer processing margins. Likewise, the Trading business posted losses (RM27m) on unfavourable trading margins and unrealised derivatives losses. Sugar contribution was slightly weaker (-2%) as raw sugar prices rose 20% in RM terms.

Management sees red in bottomline. During the results conference call, management highlighted that weaker production, currency risk and high Sugar prices are contributing factors to a poor outlook for the year. The management reiterates its expectation of a loss-making scenario in FGV for the full financial year. Given that quarter-to-date sugar prices had further risen by another 14% in RM terms, while 4Q16 production would at best only match 3Q16, we concur with management’s view and lower our FY16E earnings forecast to CNL, as discussed below.

We slash FY16E CNP by 105% to CNL of RM5m, and FY17E CNP by 46% to RM71m. We cut our Sugar earnings outlook to reflect a YoY decline of 55%, after reflecting a raw sugar price increase of c.50% in RM terms. We also tweak cost and margin assumptions to better reflect Upstream volume weakness and Downstream margin compression (due to higher PK prices).

Maintain MARKET PERFORM with lower TP of RM1.90 (from RM2.65). We lower our TP to RM1.90 (from RM2.65) based on lower PBV of 1.1x and lower BVPS of RM1.72 (from RM1.77) after earnings adjustment. Our PBV of 1.1x is based on a lower -0.5SD valuation basis (previously mean valuation) which is justified by the prospects of short-term losses, as well as rumours of government oversight and possible M&A – both denied by management, but a possible dampener on investors’ sentiment. However, we think the risks are already largely priced in, in view of the recent sharp share price correction (-32% from its YTD high of RM2.50). Hence, we maintain our MARKET PERFORM outlook on FGV.

Source: Kenanga Research - 23 Nov 2016