Felda Global Ventures Holdings Berhad (FGV)’s FY17 CNP at RM107.9m came in below consensus at 94% and our forecast at 81% on poor Sugar segment performance. No dividend was announced, as expected. We lower our FY18E CNP by 21% to RM116m, reflecting soft Sugar recovery, and introduce our FY19E CNP of RM136m. Downgrade to MARKET PERFORM on unchanged TP of RM2.00, in view of the strong share price performance since Dec 2017.

FY17 CNP below expectations. FGV recorded FY17 CNP of RM107.9m, which came in below consensus RM114.6m forecast at 94% and below our RM134.0 estimate at 81% due to poor Sugar segment contribution of only RM2m in PBT. Nevertheless, this represented a commendable reversal over FY16 which recorded a RM183m core loss. FFB production at 4.26m metric tons (MT) was within expectation at 104% of our forecast. No dividend was announced, as expected.

Plantation recovery dragged by Sugar slump. YoY, CNP reversed to RM107.9m on the back of strong Plantation recovery, as CPO selling prices rose 9%, while production saw strong recovery from 2015 droughts with a 13% surge. However, the Sugar segment struggled to recover from 1H17 losses, merely breaking even for the year with PBT of RM2m, compared to RM152m in 2016. The Logistics and Others (Logistics) segment jumped 4.7x from a low base to PBT of RM45m for the year on better CPO throughput. QoQ saw Core Net Loss (CNL) of RM4m after excluding the one-off disposal of FGV’s AXA-Affin stake, on higher quantum of tax charges (+35%) and sharply higher minority interest (+6.0x) as dividends to non-controlling shareholders soared by RM143.2m (full year: RM185.3m). Operationally, Plantation Core PBT (excluding AXA-Affin disposal) doubled to RM217.3m on better CPO prices (+2%), higher CPO sales volume (+3%), and better PKO prices (+25.3%). Sugar segment saw some PBT improvement (+78%) on lower raw sugar prices (-17%). Logistics Core PBT (excluding RM10m impairment) improved 47% to RM29.6m on better CPO volumes.

Targeting Plantation growth. In its analysts’ briefing, management highlighted its target production of 4.85-5.0m MT for FY18-19, implying FFB growth of 14-3% and FFB yield at 19.3-19.5 MT/hectare (ha). We estimate a more conservative 9-5% FFB growth based on more conservative yield expectations but acknowledge the possibility for upside should FGV begin to show signs of production recovery in excess of the sector average of 8%. Meanwhile, labour issues should soon be resolved with the approval of 8.0k visas, addressing the previous shortage of c.7.0k workers. We gather that the bulk of the labour shortage should be filled by mid-FY18.

Lower FY18E CNP by 21% to RM116m as we moderate our Sugar business recovery estimates. We also introduce our FY19E CNP of RM136m, implying earnings growth of 18%.

Downgrade to MARKET PERFORM with unchanged TP of RM2.00

as we roll forward our valuation base year to average of FY18-19E, though this minimally affects our applied BVPS of RM1.59. Our PBV valuation is unchanged at 1.25x, or slightly above mean valuation, justified by receding earnings risks, better management stability and possibility of above-average production recovery. However, with share prices appreciating by 8% since our previous upgrade to OUTPERFORM on 24-Nov-2017, we believe the market has now fairly valued FGV and thus moderate our call to MARKET PERFORM.

Source: Kenanga Research - 26 Feb 2018