FGV has introduced a Voluntary Separation Scheme (VSS) to all its general managers and above with a pool of management executives taking c.15% cuts to their allowances as part of cost management initiatives. We are positive on the move and expect savings to result in FY18E earnings improvement of c.23%. No change to our MARKET PERFORM call with higher TP of RM1.95 after updating our valuation basis to 1.2x PBV.

Manpower Optimisation Initiatives. Felda Global Ventures Holdings Bhd. (FGV) has announced a Voluntary Separation Scheme (VSS) to all its general managers and above, with an expected 15% take-up of the VSS out of the 236 senior management staff who received the offer. A pool of general managers, senior general managers and vice presidents, including the Group President and CEO Dato’ Zakaria Arshad would also be taking cuts of c.15% to their allowances. FGV clarified that the current management structure is unchanged, where Mr S. Palaniappan will remain as COO of Plantation Sector and Dato’ Khairil Anuar Aziz will remain as COO of Sugar and Logistics & Others’ Sector.

Long-term earnings positive. We are overall positive on the bottom- line impact of the move due to lower staff costs, in spite of short-term cost of the VSS. We estimate the staff cost savings to reduce FY18E costs by c.RM20m after including lower allowances, while staff count would be reduced by a negligible 35 pax, compared to the group head count of over 19k employees. Meanwhile, with top management executives remaining unchanged, we expect minimal operations impact from the move.

Neutral outlook. In spite of better bottom-line expectations, we maintain our neutral outlook on the stock as we expect higher production in 2H17 and FY18E to be offset by softer CPO prices. Meanwhile, labour woes will continue to affect productivity over the medium term with potential crop losses heading into rising production season. Meanwhile, Sugar earnings may remain weak in 3Q17 with possible improvement towards 4Q17 due to existing higher cost stocks.

Upgrade FY18E CNP by 23% to RM79m after accounting for lower salary cost as noted above.

Maintain MARKET PERFORM with higher TP of RM1.95 based on updated Fwd. PBV of 1.2x (from 1.15x) applied to unchanged FY18E BVPS of RM1.60. Our valuation basis of 1.2x implies mean valuation as we believe the stability of management direction should ease share price volatility over the medium term. 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 - 06 Nov 2017