FGV Holdings Berhad (FGV)’s 9M18 CNL of RM99m is well below consensus CNP estimate of RM33.5m and our CNL forecast of RM22m mainly on weaker-than-expected FFB output. No dividend, as expected. We enlarge FY18E CNL further from RM22m to RM187m and trim FY19E CNP by 25% to RM60m as we cut FY18/19E FFB forecasts by 10/1%. Maintain MARKET PERFORM with lower TP of RM0.965 (from RM1.46).

9M18 misses expectations, recording a core net loss (CNL) of RM99m, which fell well below consensus and our FY18E core net profit (CNP) estimates of RM33.5m and –RM22m, respectively. The deviation most likely stemmed from lower-than-expected FFB production of 3.06m MT (-0.4% YoY), which only accounts for 66% of our full-year forecast of 4.64m MT (+9% YoY). We have excluded a series of impairments amounting to RM798m, mostly from goodwill arising from the acquisition of Asian Plantation Ltd (RM513m). No dividend, as expected.

Results highlight. YoY-Ytd, FGV incurred a CNL of RM99m (vs. CNP of RM155m) as the upstream Plantation segment was dragged by lower CPO price (-16% to RM2,371/MT) and higher ex-mill CPO production cost (+10% to RM1,800/MT). Meanwhile, downstream Plantation was adversely affected by weaker margins in R&D, kernel crushing and refining as well as lower sales volume in its fertiliser business. Positively, Sugar segment turned into the black with PBT of RM71m (vs. a LBT of RM26m) as average raw sugar cost dropped from RM2,153/MT to RM1,668/MT. Likewise, Logistics and Support (L&S) division also returned to profitability (PBT of RM25m vs. LBT of RM41m) on higher handling rate and more security services provided.

QoQ, despite lower CPO price (-8% to RM2,224/MT), 3Q18 CNL narrowed to RM35m from RM65m as higher FFB output (+8%) eased ex-mill CPO production cost by 6% to RM1,777/MT. However, this was dampened by poorer performances in (i) Sugar, due to lower sales volume coupled with lower average selling prices, and (ii) L&S, due to lower tonnage carried.

Outlook. Moving into 4Q, while having completed its fertiliser program and a likely seasonal pickup in FFB output should bring down production cost further, depressed CPO price is expected to keep FGV in losses. During briefing, management was sanguine that CPO prices would recover to RM1,900-2,100/MT by year-end, which still represents 6-15% drop from 3Q’s average. Management does not foresee further kitchen-sinking exercises going forward.

We enlarge FY18E CNL further from RM22m to RM187m and trim FY19E CNP by 25% to RM60m as we cut FY18/19E FFB forecasts by 10/1% from 4.64/4.86m MT (+9/+5%) to 4.19/4.81m MT (-2/+15%).

Maintain MARKET PERFORM with lower TP of RM0.965 (from RM1.46) based on lower Fwd. PBV of 0.65x (from 0.95x) applied to FY19E BVPS of RM1.48. Our PBV valuation basis is reduced to -3.0SD (from -1.0SD) given FGV’s deep losses and this is the fourth consecutive quarter of earnings disappointment. Nevertheless, we believe the group could potentially return to profitability in FY19 on sturdy FFB production outlook (+15%) and the absence of impairments.

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-than- expected operating cost, and (iv) a precipitous rise in minimum wage.

Source: Kenanga Research - 29 Nov 2018