FGV Holdings Berhad (FGV)’s FY18 CNL of RM201.3m is slightly worse than our expectation at 107% but within the consensus estimate at 104%. No dividend was declared, as expected. We believe FY19 would be a better year for FGV as it focuses on improving efficiency and plugging leakages. Increase FY19E CNP by 28% on marginal CNP margin improvements of +0.2ppt and introduce FY20E numbers. Maintain MARKET PERFORM on a higher TP of RM1.15 (from RM0.800).

FY18 weaker than we expected, but within consensus. FY18A recorded a core net loss (CNL) of RM201.3m, exceeding our FY18E CNL of RM187m (107%), but within consensus expectation of RM194m CNL (104%). The deviation from our estimates was mainly due to top- line which came in below our expectation at 81% on a lower-than- expected CPO price in FY18 of RM2,282/MT (vs. our expectation of RM2,300/MT). Note that our CNL assumptions exclude a series of impairments amounting to RM988m, mostly from goodwill arising from the acquisition of Asian Plantation Ltd (RM513m), impairments on PPE (RM197m), impairments on receivables (RM126m), write-offs, provisions, and other one-off items. No dividend, as expected.

Results highlight. YoY-Ytd, FGV incurred a CNL of RM201.3m (vs. CNP of RM127.7m) primarily due to the upstream Plantation segment which was dragged down by a weak top-line (-20%) on lower CPO price (-18% to RM2,282/MT), despite higher CPO sales volume of 2.1m MT (vs. 1.7m MT in FY17). This was on the back of higher share of losses from joint venture (RM29m), and marginally higher finance cost (+2%) related to the Johor refinery. Note that CNL was post stripping out RM988m of one-off items (i.e. impairments, provisions, write-offs). QoQ, top-line was up slightly (+1%) on improvements from the logistics and support business (LSB) likely from the commodities marketing business. However, decline in the plantation segment (-1%) due to lower CPO prices of RM2,053/MT (-8%) and weaker sugar segment on lower average selling price and sales volume as well as higher financing cost, and higher taxes paid of RM99m (vs. RM3m) caused CNL to widen to RM102m.

Outlook. Going forward, management is focused on plugging operational inefficiencies within FGV by increasing mechanization, labour improvements, using IT to track improvements and for data gathering as part of its transformational plan to improve the efficiency, productivity and profitability of FGV. Moving into FY19, management does not foresee further kitchen-sinking exercises going forward. We came away from the briefing feeling positive on management’s turnaround plans and believe there will be gradual earnings improvements in coming quarters. *Increase FY19E CNP by 28% to RM76m and introduce FY20E numbers as we lower cost assumptions marginally resulting in a slight improvement to FGV’s razor thin CNP margins to 0.5% (from 0.3%) (refer overleaf).

Maintain MARKET PERFORM on a higher TP of RM1.15 (from RM0.800) based on higher Fwd. PBV of 0.90x (from 0.63x) applied to a slightly higher FY19E BVPS of RM1.29 (from RM1.27). Our PBV valuation is increased to -1.0SD (from -3.0SD) as we believe the group could potentially return to profitability in FY19 on better cost control in the hands of new management while slight margin improvements would bode well given the low base effect in FY18A. However, if earnings continue to miss in coming quarters, we may re-look to downgrade our call.

Source: Kenanga Research - 01 Mar 2019