FGV’s 1Q19 CNL of RM36.9m is deemed within our expectation as we anticipate widening losses in subsequent quarters. However, CNL was a negative surprise to consensus’ CNP of RM64.1m. No dividend was declared, as expected. No changes to our FY19-20E earnings estimate. Maintain UP with an unchanged TP of RM1.05.

Deemed within expectations. 1Q19 recorded a Core Net Loss (CNL) of RM36.9m, which we deem within our expectation as we expect losses to widen in subsequent quarters on lower CPO prices. On the contrary, the CNL came as a negative surprise to consensus’ profit estimate of RM64.1m, likely due to lower-than-expected CPO prices. FFB output of 1,056k MT was in line with expectation, at 24% of our full-year forecast. Note that our CNL excludes net reversal of receivables impairments (RM47m). No dividend was declared, as expected.

Results highlight. YoY, FGV registered CNL of RM36.9m (vs. 1Q18 CNP of RM0.9m), owing to a 20% decline in average CPO price, masking a 7% increase in FFB output. Meanwhile, Sugar segment fell into the red with LBT of RM3m (from PBT of RM22m) on the back of 12% decline in average selling price of sugar to RM2,157/MT and 12% increase in average refining cost to RM362/MT. Similarly, logistics registered LBT of RM17m (vs. PBT of RM24m) due to provisions and impairments totaling RM41m. QoQ, despite FFB output and average CPO price, declining 8% and 3%, respectively, CNL narrowed to RM36.9m from RM102.0m in 4Q18, mainly due to lower taxes and better downstream profits.

Outlook. Moving forward, management remains focused on eliminating operational inefficiencies within FGV and has already identified 50% targeted cost savings of RM150m from cost-control and rationalization exercises. While this coupled with its completed fertiliser program and pick-up in FFB output should bring down production cost further, depressed CPO price is expected to keep FGV in losses in the near-term.

No changes to our FY19-20E estimates as we expect losses to widen in the subsequent quarters on the back of lower CPO prices.

Maintain UNDERPERFORM on an unchanged Target Price of RM1.05 based on Fwd. PBV of 0.90x applied to a CY20E BVPS of RM1.20, reflecting -1.0SD from mean, given potential divestment of non-core and non-performing assets. Risks to our call are: (i) sharp rises in CPO prices, (ii) higher-than-expected FFB production, (iii) lower-than-expected operating cost, and (iv) decline in minimum wage.

Source: Kenanga Research - 30 May 2019