1HFY20 CNL of RM120.2m is within our, but above consensus expectation, as we expect significant earnings improvement in 2HFY20. Management’s FFB guidance (+6%) may be optimistic as 7MFY20 FFB output is still c.11% lower YoY. No changes to earnings estimates. Upgrade to MARKET PERFORM with an unchanged TP of RM1.15 based on FY21E PBV of 1.0x (mean). While we anticipate downward pressure on CPO price upside, FGV’s share price has recently fallen 9% to a more reasonable valuation level (Fwd. PBV of 1.03x), warranting a MARKET PERFORM call.

Within expectations. 2QFY20 returned to the black, registering core net profit (CNP) of RM36.5m, bringing 1HFY20 core net loss (CNL) to RM120.2m which is within our CNP estimate of RM91.3m, but above consensus’ CNL estimate of RM31.5m as we expect significant improvement in 2HFY20 earnings. 1HFY20 FFB output of 1.90m MT (-14% YoY) is also within expectations, accounting for 46% of our full-year estimate (5-year 1HFY average: 47%). The absence of dividend was expected.

Lower output the main culprit. YoY, 1HFY20 CNL widened (+43%) as lower FFB output (-14%) overshadowed higher CPO price (+26%). This drove CPO production cost (ex-mill) higher (+21%) to RM1,711/MT, which caused Plantation segmental LBT to widen (+635%) to RM105.0m. QoQ, 2QFY20 CNP of RM36.5m was recorded (vs. CNL of RM156.7m in 1QFY20) as the recovery in FFB output (+67% - from a low base) far outpaced the decline in CPO price (- 13%).

2HFY20 CPO price seen at RM2,400-2,600/MT while FY20 FFB target is c.4.7m MT. Management believes that peak production should happen in the month of October and has a target FY20 FFB of 4.7m MT (+6% YoY). However, from what we understand, 7MFY20 FFB output is still c.11% lower YoY. As such, we are keeping our FY20 FFB target of 4.17m MT (-6% YoY). Meanwhile, management expects 2HFY20 CPO price to trend lower and range between RM2,400-RM2,600/MT as production picks up. Nevertheless, we expect to see a sequential improvement in 3QFY20 premised on higher CPO prices (QTD 3QFY20: +18% QoQ).

No changes to FY20-21E earnings as results and updates are in-line with expectations.

Upgrade to MARKET PERFORM with an unchanged TP of RM1.15 based on an unchanged FY21E PBV of 1.0x, reflecting mean. While we anticipate rising production in the coming months to exert downward pressure on CPO price, we note that FGV’s share price has recently fallen 9% (from Fwd. PBV of 1.13x, +0.75SD) to a more reasonable valuation level (Fwd. PBV of 1.03x), warranting a MARKET PERFORM call.

Source: Kenanga Research - 25 Aug 2020