Felda Global Ventures Holdings Berhad (FGV)’s 1H18 CNL of RM64m is well below consensus’ full-year CNP estimate of RM141m and ours of RM64m mainly on weaker-thanexpected CPO and PK margins. No dividend, as expected. We cut our FY18-19E CNP by 46-29% to RM35-79m. Downgrade to MARKET PERFORM (from OP) on lower TP of RM1.60 (from RM1.75) based on lower Fwd. PBV of 1.00x (from 1.10x).

1H18 misses expectations, recording a core net loss (CNL) of RM64m, which fell well below consensus and our FY18E CNP of RM141.0m and RM64m, respectively. We believe the deviation is mostly due to weaker CPO and PK margins from lower selling prices and higher operating costs. FFB production of 1.99m metric tons (MT) was broadly within our expectation at 43% of our full-year forecast as we expect rising production in 2H18. No dividend, as expected.

Results highlight. YoY-Ytd, FGV incurred a CNL of RM64m (vs. CNP of RM34m) due to a decline in the Plantation PBT by 94% on lower CPO prices (-16%) vs. FFB production growth of 7%, which was not sufficient to offset the decline in CPO price. The segment incurred higher cost due to; (i) lower CPO and PK margins on higher CPO production cost, (ii) narrower margins for Refined Bleached Deodorised Palm Kernel Oil (RBDPKO), (iii) lower margins and sales for planting materials in R&D business, and (iv) reduction in sales volume for the fertiliser business. However, the decline was offset by improvements in; (i) Sugar segment which saw a reversal to PBT of RM50m (vs. LBT of RM42m) on lower raw sugar cost, and (ii) Logistics segment which saw a reversal to PBT of RM57m (vs. LBT of RM40m) on higher throughput and tonnage. QoQ, 2Q18 saw a negative reversal to RM65m CNL (vs. RM1m CNP), also attributable to a weaker Plantation segment’s LBT of RM7m (vs. RM18m PBT) from lower CPO prices (-2%) and flattish FFB volume, as well as weaker margins due increase in CPO production cost. Meanwhile, the Sugar Segment and Logistics segments’ PBT was up by 27% and 24%, respectively, on lower raw sugar cost and better margins for commodities marketing.

Outlook. We expect the fertilizer program to be completed by 3Q18, translating to lower cost in 4Q18 and better earnings upside for 2H18. We maintain our FY18 FFB production target of 4.60m MT (+8%) which we believe is conservative vs. management’s target of 4.85m MT (+14%). As the Group’s Trading operations switched over to commission basis, we expect much lower earnings volatility from the Logistics sub-segment, while Sugar segment should see gradual improvement on lower raw sugar prices. However, the unexciting CPO price outlook, high production cost vs. other planters, and additional cost of a proposed Mutual Separation Scheme (MSS) in 2H18 remains the main drag on earnings.

We trim FY18-19E CNP by 46-29% to RM35-79m (from RM64-111m)

as we update our unit cost expectations, on lower CNP margins to 0.2- 0.4% (from 0.5-0.6%) in FY18-19.

Downgrade to MARKET PERFORM (from OP) with lower TP of RM1.60 (from RM1.75) based on lower Fwd. PBV of 1.00x (from 1.10x) applied to average FY18-19E BVPS of RM1.59. Our PBV valuation is reduced to -0.5SD (from mean valuations) in light of cost pressures which has eroded earnings, but we believe this may be partially offset by potentially better FFB production in 2H18 and improvement in the Sugar and Logistics segments.

Risks to our call are: (i) sharp rises and falls in CPO prices, (ii) lower or higher-than-expected FFB production, (iii) higher or lower-thanexpected operating cost, and (iv) a precipitous rise in minimum wage.

Source: Kenanga Research - 29 Aug 2018