Felda Global Ventures Holdings Berhad (FGV) 1Q17 Core Net Profit (CNP*) at RM2.8m missed expectations, at only 2% of consensus and 3% of our forecast on Sugar losses. No dividend was announced, as expected. We cut FY17- 18E CNP estimates by 55-26% to RM43-89m. Maintain MARKET PERFORM with a lower TP of RM1.85 as we lower our valuation basis to 1.15x PBV (-0.5SD valuation) from 1.30x (near mean valuation) on rising external risks.

Below expectations. FGV recorded 1Q17 CNP of RM2.8m, coming in below both consensus RM171m forecast (2%) and our RM95m estimate (3%) on the back of losses in its Sugar businesses (RM23m PBT). No dividend was announced, as expected.

Sugar slider. YoY, CNP reversed from a RM76m loss on lower plantation loss before tax (LBT) of RM1m from RM82m, as CPO prices rose 33% while FFB production improved 3%. However, Sugar segment saw losses of RM23m, from PBT of RM62m, on higher raw sugar prices (c.US�21.0) from US�14.4 in 1Q16 (+46%) while local selling price only increased by 11.0 sen to RM2.95 (+4%). Logistics and Others (Logistics) segment saw reversal to profit of RM10m (from LBT of RM11m) on better transport volume. QoQ, CNP reversed from a RM95m loss largely on lower tax bill (close to zero) compared to RM131m in 4Q16. Meanwhile, higher CPO prices (+8%) offset seasonally weaker production (-14%). However, with the company changing to three reporting segments (from four), we are unable to directly compare the new segments against the previous quarter.

Gradual recovery. Management noted that CPO prices have started trending down with higher FFB production in Malaysia and Indonesia. However, Malaysian production could come in lower than 2015 on lower OER and labour shortage. Meanwhile, MSM management in their results conference call noted that they expect to see better performance in the coming quarters on the back of lower provisions and higher exports. On a different note, FGV management mentioned that recent news of major shareholder Felda ?seeking the return of the land that is currently leased out to and managed by FGV? would be fairly unlikely, and noted that Felda would have to pay FGV for terminating the lease early, based on a previously determined formula. Nevertheless, we think the news could dampen investors? sentiment considering the significant potential revenue impact should Felda decide to terminate the LLA. Other external events could also impact medium-term earnings, as FGV has created a RM33m provision for litigation losses on a suit related to delivery of their products.

Reduce FY17-18E CNP to to RM43-89m (-55% and -26%) as we lower our Sugar earnings assumption on the back of higher raw sugar costs.

Maintain MARKET PERFORM with lower TP of RM1.85 (from RM2.10) as we roll forward our valuation base year to average FY17-18E for slightly higher BV of RM1.60 (from RM1.59). We also lower our Fwd. PBV to 1.15x from 1.30x on a lower valuation basis of -0.5SD (from close to mean valuation) due to rising external risk factors such as land lease revocation, litigation and weak sugar prices. However, we expect the Plantation business to post improvement against last year, thanks to stronger 1H17 CPO prices, production recovery, and new contribution from young areas.

Source: Kenanga Research - 01 Jun 2017