FGV’s 1H19 CNL of RM83.9m is above our expectations at 29%, mainly due to higher-than-expected contribution from logistics division from higher utilization and higher-than expected OER. FFB output for 1H19 of 2.20m MT is within expectation, at 49%. No dividend was declared, as expected. Reduce FY19-20E CNL to RM124.1-RM16.6m. Upgrade to MP with a lower TP of RM1.00.

Above expectations. 2Q19 recorded Core Net Loss (CNL) of RM47.1m, bringing 1H19 CNL to RM83.9m, which is above our expectation at 29% but a negative surprise to consensus profit estimate of RM16.3m. The positive deviation is due to higher-than-expected contribution from its logistics division on higher utilization and higher than-expected OER of 20.5% (vs. our FY19E: 20.0%). FFB output for 1H19 of 2.20m MT was in line with expectation, at 49% of our full-year forecast. No dividend was declared, as expected.

Results highlight. YoY, 1H19 CNL of RM84.0m widened by 31%, due to: i) decline in average CPO price (-19%), overshadowing the increase in FFB output (+11%), ii) sugar segment registering LBT of RM56.0m (vs. PBT of RM49.9m in 1H18) as the average selling price of sugar declined (-14%) to c.RM2,100/MT, iii) higher financing cost for its new Johor refinery, and iv) logistics division’s PBT, which shrunk 54% to RM26.3m, as the division’s revenue declined 59%. QoQ, 2Q19 CNL widened (28%) to RM47.1m dragged by: (i) plantation division on softer average CPO prices (-2%) and lower CPO sales volume (-13%), as well as (ii) sugar division on higher finance cost and depreciation for its new Johor refinery.

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 a pick-up in FFB output should bring down production cost, this should be partially offset by higher fertilizer cost (65% to be applied in 2H19) and is expected to keep FGV in losses in the near term.

Reduce FY19-20E CNL to RM123.6-RM16.1m as we factor in improved margins on higher utilization from its logistics division and tweaked our OER higher (0.5ppt) to 20.5%.

Upgrade to MARKET PERFORM, but with a lower Target Price of RM1.00 based on Fwd. PBV of 0.80x (from 0.90x) applied to a CY20E BVPS of RM1.20, reflecting -1.25SD from the mean, given that the company remains loss-making and uncertainty regarding its LLA with Felda remains. Nevertheless, at current price, we believe negatives have been mostly priced in.

Risks to our call are: (i) sharp rise/drop in CPO prices, (ii) higher/lower-than-expected FFB production, (iii) higher/lower-than expected operating cost, and (iv) increase/decline in minimum wage.

Source: Kenanga Research - 29 Aug 2019