1QFY20 CNL of RM139.2m disappointed both our and consensus’ expectations stemming from lower FFB output (-33%), at merely 16% of our full-year estimate. We see downside to management’s FFB guidance. As 5MFY20 FFB output is still c.23% lower YoY, management’s flat FY20 FFB growth seems to be a ‘best-case scenario’. Slash FY20-21E CNP by 66-56% (low base effect) on lower FFB output and CPO price forecasts. Downgrade to MP with a higher TP of RM1.05 on higher rolled over FY21E PBV of 0.90x. Recentshare price correction (-14%) has resulted in a more reasonable valuation level (Fwd. PBV of 0.93x), warranting a MP call.

Below expectations. 1QFY20 registered core net loss (CNL) of RM139.2m which is below both our/consensus’ full-year CNP estimate of RM271.3m/RM106.2m. The negative deviation mainly stemmed from lower than-expected FFB output of 712k MT (-33%), accounting for merely 16% for our full-year estimate. Absence of dividend was expected.

Punished by lower output. YoY, despite higher CPO price (+34%), 1QFY20 CNL widened (2.8x) dragged by lower FFB output (-33%). This drove CPO production cost (ex-mill) higher (+58%) to RM2,177/MT, which resulted in Plantation segmental LBT of RM152.1m (vs. segmental PBT of RM39.8m in 1QFY19). QoQ, 1QFY20 CNL of RM139.2m was recorded (vs. CNP of RM112.0m in 4QFY19) as lower FFB output (-29%) outstripped higher CPO prices (+24%), resulting in a 29% increase in CPO production cost (ex-mill).

CPO price seen at RM2,200-2,400/MT while FY20 FFB target remains at 4.5m MT. Management believes that a mini peak for production should happen in 2QFY20 and is maintaining its flat FY20 FFB target of 4.5m MT. However, from what we understand, 5MFY20 FFB output is still c.23% lower YoY. As such, we opine that management’s flat FY20 FFB growth is a ‘best-case scenario’ and prefer to adopt a more conservative stance by projecting FFB output of 4.17m MT for FY20. On production cost, given: (i) our conservative view on FFB output, (ii) 1QFY20 CPO cost of RM2,177/MT, and (ii) higher application of fertilizer in FY20, management’s budgeted FY20 CPO production cost of c.RM1,500/MT seems optimistic.

Slash FY20E/FY21E CNP by 66%/56% (low base effect) on: (i) lower FY20E/FY21E FFB output by 9%/5%, implying post revision FFB growth of - 7%/+6% (vs. +2%/+3% previously), and (ii) lower CY20/CY21 CPO price forecast to RM2,300/RM2400 per MT (from RM2,550/MT previously). Post earnings revision, FY20-21E DPS is also lowered to 2.0-4.0 sen (from 4.0-6.0 sen).

Downgrade to MARKET PERFORM but with a higher TP of RM1.05 (from RM0.950) based on a higher rolled over FY21E PBV of 0.90x (from 0.82x), reflecting -1.0SD from mean. While we anticipate rising production in the coming months to cap CPO price upside, we note that FGV’s share price has recently fallen 14% to a reasonable valuation level (Fwd. PBV of 0.93x), warranting a MARKET PERFORM call

Source: Kenanga Research - 29 May 2020