Below consensus, but within our forecast. FGV 1H17 CNP of RM23.2m missed consensus estimates at 19% of RM123m, but came in within our expectation at 55% of our RM42.6m forecast. This may be due to lower-than-anticipated production, as management lowered their FY17 output estimate to 4.3m metric tons (MT) (from 4.5m MT). YTD FFB production of 1.85m MT is within our more conservative FY17 estimate of 4.11m MT. No dividend was announced, as expected.

Plantation and Sugar swap places. YoY, CNP reversed into RM21m profit from a Core Net Loss (CNL) of RM52m thanks to higher CPO prices (+19%) leading to Plantation turning profitable with PBT of RM148m. However, stubbornly high Sugar prices caused the segment to suffer losses of RM42m, from PBT of RM99m previously. 1H17 recorded higher raw sugar prices of 76 sen or +18% YoY as USD Sugar prices rose 10% to USD¢17.3 while USD/MYR appreciated 7% to 4.39. QoQ saw CNL of RM16m largely on higher tax charge (RM59m from near zero in 1Q17) though revenue weakened 2% as Plantation revenue softened 4% due to lower CPO prices (-9%), which offset strong improvement in FFB production (+30%). Sugar losses lessened slightly to RM18m (-20%) as raw sugar prices softened 2% to 67.0 sen on lower USD Sugar price (-10% to USD¢15.4) despite higher USD/MYR (+8% to 4.33).

Labour woes. While FGV expects 2H17 production to improve over 1H17, in its analysts’ conference call, management lowered its full-year production expectation by 200k MT to 4.3m MT due to labour shortages and weaker-than-expected production on young mature area. However, with >1.0k guest workers recently brought in to cover an estimated c.7.0k acute worker shortage, management hopes to see its labour woes resolved by year end, reducing crop losses in the near term. In its conference call on 29 August, MSM’s management expects its sugar businesses to see improvement as raw sugar prices have come down, although existing high-cost stocks mean that meaningful improvement may only be seen towards 4Q17. Meanwhile, FGV’s management also noted that it aims to strengthen its financial position by divesting non-core or non-performing business, including its 16% stake in AXA-Affin Insurance, which has a book value of RM90m.

No change to FY17-18E CNPs with 1H17 CNP coming in in line with our expectation.

Reiterate MARKET PERFORM with updated TP of RM1.60 (from RM1.85) as we roll forward our valuation base year to FY18E for slightly higher BV of RM1.61 (from RM1.59). We also update our Fwd. PBV to 1.0x from 1.15x with unchanged valuation basis of -0.5SD which we feel is justified given continued external risks such as management issue, potential land lease revocation and slow recovery in the Sugar segment. However, we expect the Plantation business to continue seeing improvement thanks to stronger CPO prices, production recovery, and new contribution from young areas.

Source: Kenanga Research - 05 Sep 2017