FGV’s CNL of RM60.5m for 9MFY19 was lower than expected mainly due to lower-than-expected CPO production cost of RM1,447/MT (-22%) vs. our expected RM1,600/MT (-14%). With the 4QFY19 strongly expected to improve, we deem the results as having exceeded our/consensus’ FY19 CNL expectation of RM60.6m/RM78.9m. FFB output for 9MFY19 of 3.44m MT is within expectation, at 75% of estimate. No dividend was declared, as expected. We reduce FY19E CNL by 67% to RM20.1m and increase FY20E CNP by 78% to RM152m. Maintain MP with a higher TP of RM1.25.

Above expectations. 3QFY19 registered core net profit (CNP) of RM23.4m, narrowing 9MFY19 core net loss (CNL) to RM60.5m, which is above our/consensus’ FY19 CNL of RM60.6m/RM78.9m. The positive deviation stemmed from lower-than-expected CPO production cost of RM1,447/MT (-22%) vs. our expected RM1,600/MT (-14%). Note that we have excluded a series of impairments amounting to RM252m. Meanwhile, 9MFY19 FFB output of 3.44m MT came within at 75% of estimate. No dividend was declared, as expected.

Results highlight. YoY, 9MFY19 CNL narrowed to RM60.5m on the back of: (i) lower CPO production cost (-22%), and (ii) Downstream margin improvement (+5ppt) on higher sales volume of packed products (FMCG), biodiesel and oleochemicals. QoQ, 3QFY19 recorded CNP of 23.4m (vs. CNL of RM47.1m in 2QFY19) mainly due to: (i) higher FFB/CPO production of +8%/+6%, and (ii) higher CPO prices (+1%).

A better 4QFY19 ahead. Having done a series of impairments, management does not expect further impairments going into 4QFY19 and earnings are expected to improve on higher CPO prices (QTD 4QFY19: +14%). However, this should be partially neutralized by higher fertilizer costs. We understand that 9MFY19 fertilizer application is at 45% and management intends to apply an additional 20% by 4QFY19 (FY19: 65%), translating into higher costs. Having said that, FFB growth for 2020 should not be affected by the lower fertilizer application (targeted 65% in FY19) as the trees will be supplemented with liquid organic fertilizer (supplies nutrients to plants in a faster-acting form).

Reduce FY19E CNL by 67% to RM20.1m and increase FY20E CNP by 78% to RM152m as lower CPO production cost by 6%/7% to RM1500/MT.

Maintain MARKET PERFORM with a higher Target Price of RM1.25 (from RM1.15) based on a higher Fwd. PBV of 0.99x (from 0.90x), reflecting close to mean valuation on: (i) more concrete signs or earnings improvement, especially for its upstream division, (ii) FFB growth prospects 7-4%, and (iii) a potentially profitable FY20.

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 Nov 2019