FGV announced that CEO Dato’ Zakaria will resume his duties on 16 Oct 2017. We are positive on the news in spite of minimal earnings impact, as the return of the CEO should alleviate the uncertainty regarding the company direction. No change to earnings. Reiterate MP with higher TP of RM1.85 as the lower uncertainty should improve investor confidence. Nevertheless, the outlook remains neutral.

Return of Dato’ Zakaria. Felda Global Ventures Holdings Bhd. (FGV) announced that the Special Shareholder, the Minister of Finance (Incorporated) (“MOF”) had required for the domestic enquiry (DI) on FGV Group President(GP)/CEO Dato’ Zakaria Arshad (Dato’ Zakaria) to be carried out in line with integrity, spirit of impartiality of the ongoing inquiry and ensuring proper corporate governance. The DI has been carried out with proper internal processes and the findings of the DI were submitted to the Special Shareholder in line with Article 80, of FGV’s Memorandum and Articles of Association. After taking into consideration the ongoing FGV transformation program and the GP/CEO’s commitment and assurance to resolve the long outstanding debt of Safitex Trading LLC., the Special Shareholder would like Dato’ Zakaria to return as the GP/CEO of FGV. FGV announced that Dato’ Zakaria shall resume his duties on 16 Oct 2017.

Management clarity bodes well. We are positive on the news. With the hiatus of both the CEO and CFO of FGV, management decisions were made in the interim by a management committee. Although such an arrangement would be sufficient for maintaining day-to-day operations, we believe the longer-term company direction requires further guidance, which may not be possible under a temporary committee. While the decision may have no immediate earnings impact, we think the return of the CEO should reduce long-term uncertainty regarding the company direction. As such, we expect the market to react positively to the news.

Company outlook still neutral. While the return of Dato’ Zakaria reduces an element of uncertainty, we remain neutral over the overall group outlook. Although production is expected to improve in 2H17, the company’s labour woes are expected to continue over the mid-term, leading to some crop losses. Meanwhile, Sugar earnings may remain weak in 3Q17 with possible improvement towards 4Q17 due to existing higher cost stocks.

Maintain FY17-18E CNP at RM49-64m given minimal earnings impact on the decision.

Reiterate MARKET PERFORM on FGV with higher TP of RM1.85 based on higher Fwd. PBV of 1.15x (from 1.0x) applied to unchanged FY18E BVPS of RM1.60. We up our valuation to 1.15x from 1.10x, implying mean valuation (from -0.5SD) as we believe the resolution of management suspensions should improve investor confidence while reducing long-term uncertainty over the company direction. However, we remain neutral over the company’s outlook, with better production prospect offset by labour scarcity, while the effect of lower raw sugar prices may not be felt immediately given high existing stocks.

Source: Kenanga Research - 10 Oct 2017