FGV’s FY16 Core Net Loss (CNL) at RM157m came in below consensus RM60m CNL and our RM5m CNL estimates on lower Sugar contribution, higher CPO cost and higher impairments. No dividend was announced during for the quarter and year, below our expected 2.0 sen DPS. Maintain FY17E CNP as we introduce FY18E CNP. Maintain MP with slightly higher TP of RM1.85 (from RM1.72) on updated PBV of 1.15x (from 1.10x).

FY16 still in red. Felda Global Ventures (FGV) FY16 Core Net Loss (CNL) of RM157m came in below both consensus CNL RM60m and our CNL forecast (RM5m) due to weaker Sugar and Downstream contributions, as well as lower FFB production (-16% YoY) due to drought effect. Nevertheless, FY16 FFB production at 3.91m metric tons (MT) came in within 98% of our 3.98m MT forecast. No dividend was announced for this quarter and year, which missed our expected DPS of 2.0 sen, though we gather that the FGV Board may consider declaring a dividend once audited accounts are ready in March.

Weaker Sugar and Downstream performance. YoY, CNL increased 48% to RM157m despite higher revenue (+11%). This was largely due to weaker Sugar performance, where PBT declined 59% as higher Sugar prices (+39% to USD18.2¢/pound (lbs)) and USD/MYR appreciation (+6% to MYR4.14) caused raw sugar prices in MYR to rise 47%. Downstream segment saw a reversal into losses (LBT of RM53m) on impairments due to the closure of a Sabah refinery as well as weaker margins due to higher PK input cost. Upstream PBT (excluding fair value LLA movement) softened 32% to RM471m as CPO price improvement (+16%) could not offset weaker production (- 16%), higher unit costs, and impairments on the closure of four oil mills with corresponding provisions on MSS. QoQ, CNL widened by 2x to RM95m on higher impairments and weaker Sugar performance (-46%) which saw another 10% raw sugar price hike in RM terms. Operations were stronger, however, as EBIT rose 2.5x with Upstream EBIT (excluding fair value LLA movement) improved 36% to RM266m on better CPO prices (+14%) which offset seasonally lower FFB production (-17%). Downstream segment registered higher losses largely on higher impairments.

Better upstream outlook. During the results briefing, management struck a more optimistic note as they mentioned that most impairments have been executed, while M&A activity will be reduced in favour of focusing on core businesses. We understand that c.18.0k hectares (ha) is maturing in 2017 which, coupled with drought recovery, should improve FFB production by 4% (close to our expected 5%). Management also provided their 2020 operating targets of 5.26m MT FFB production (implying a 4-year CAGR of 7.7%), FFB yield of 20.0 MT/ha (FY16A: 14.5MT/ha), OER of 21.9% (FY16A: 20.7%) and average age of 12-13 years. We think the targets are ambitious, but achievable, barring weather issues, and assuming a consistent replanting plan of c.17k ha/year.

Maintain FY17E CNP of RM95m as we introduce FY18E CNP of RM120m. We maintain our relatively conservative CNP estimate as we expect less impairment surprise for the year, while introducing our FY18E CNP of RM120m, which implies EPS growth of 26% on the back of FFB growth at 5%.

Maintain MARKET PERFORM with higher TP of RM1.85 (from RM1.72) based on updated PBV of 1.15x (from 1.1x) on unchanged BVPS of RM1.61. Our latest PBV of 1.15x is based on unchanged - 0.5SD valuation basis which is in line with our valuations for planters with below average FFB growth (FGV: 5-5% vs. sector average 8- 10%). With softer Sugar performance offset by better Upstream productivity, we reiterate our MARKET PERFORM call on FGV.

Source: Kenanga Research - 1 Mar 2017