Felda Global Ventures Holdings Berhad (FGV)’s 1Q18 CNP of RM0.9m is well below consensus’ RM197m and our RM116m estimate on lower CPO prices and front-loaded operating costs. No dividend was announced, as expected. We cut our FY18-19E CNP by 44-18% to RM64-111m. Downgrade to MARKET PERFORM on lower TP of RM1.75 (from RM2.00) based on lower Fwd. PBV of 1.10x (from 1.25x).

1Q18 CNP misses expectations at only RM0.9m, falling far short of consensus’ RM197.0m forecast and our RM115.6m estimate on lower CPO prices and front-loaded operating costs. Production at 991k metric tons (MT) was in line with expectation at 21% of our full-year forecast. No dividend was announced, as expected.

Sugar turning around. YoY, CNP declined 98% as Plantation PBT declined 36% against 1Q17 core PBT (excluding impairment of RM29.6m) on lower CPO prices (-19%) which could not be offset by better FFB production (+23%). We gather that higher costs were incurred for the quarter due to faster pace of fertilizer application and front-loading of replanting costs. Meanwhile, Sugar segment saw a reversal to PBT of RM22m, from LBT of RM23m on lower raw sugar prices (-29% to USD¢13.6). Logistics PBT jumped 1.6x on the back of higher throughput. QoQ saw a reversal from 4Q17 CNL of RM4m despite weaker Plantation PBT (-94%) on lower CPO prices (-9%) and FFB volume (-17%) as tax charges (-91%) and minority interest (-91%) fell significantly. Logistics segment also saw a reversal to PBT of RM25m from core LBT of RM53.5m (excluding RM73.1m gain on disposal of its AXA-Affin stake). Sugar segment PBT weakened 21% on 10% lower sugar sales volume.

Expect stronger year-end. At its results conference call, management noted that that they expect to complete their fertilizer program by 3Q18, which would likely lead to lower costs in 4Q and therefore better earnings upside towards 2H18. The company continues to target FY18 FFB production of 4.87m MT which implies 14% full-year growth, compared to our conservative +8% target. With its Trading operation largely changed over to a commission basis, we expect much lower earnings volatility from the sub-segment, while Sugar segment should see gradual improvement as raw sugar prices continued to correct in the quarter-to-date (-13% to USD¢11.9). However, given the weak CPO price outlook, relatively high all-in production cost (inclusive of LLA) compared to other planters, and additional cost of a proposed Mutual Separation Scheme (MSS) in 2H18, we expect FGV’s belowaverage ROE (1.1% vs. sector ROE of 6.1%) track record to continue.

Cut FY18-19E CNP by 44-18% to RM64-111m as we update our unit cost expectations and impute additional one-off cost of MSS into our forecast (c.RM30-55m by our estimate).

Downgrade to MARKET PERFORM with lower TP of RM1.75 (from RM2.00) based on lower Fwd. PBV of 1.10x (from 1.25x) applied to average FY18-19E BVPS of RM1.59. Our PBV valuation is reduced to mean valuation (from near +0.5SD) given the short-term higher cost expectation and our expectation of average FFB growth outlook (8% vs. sector average of 8%). Despite receding operational and management risks, we expect short-term earnings setback given our higher cost expectations, and therefore moderate our call to MARKET PERFORM (from OUTPERFORM).

Source: Kenanga Research - 30 May 2018