9MFY20 CNP of RM132.5m is above both our/consensus’ estimates due to higher-than-expected FFB output. Management anticipates downside to CPO prices, ranging between RM2,500-2,600/MT for 1HFY21. More aggressive manuring application is expected in 4QFY20 (9MFY20: 68%). Raise FY20-21E earnings by 46-13% on higher FFB output. Maintain MARKET PERFORM with a higher TP of RM1.25 (from RM1.20) based on FY21E PBV of 1.0x (-0.5SD).

Above expectations. 9MFY20 registered core net profit (CNP) of RM132.5m (vs. CNL of RM60.5m in 9MFY19), which is above both our/consensus’ estimates at 96%/21x. The deviation was mainly due to higher-than-expected 3QFY20 FFB output of 1.35m MT (+9% YoY), accounting for 32% (vs. our expected 28%) of our initial target. Meanwhile, 9MFY20 FFB output is at 78% of our target. The absence of dividend was expected.

Double-barreled boost. YoY, 9MFY20 returned to the black with CNP of RM132.5m (vs. CNL of RM60.5m in 9MFY19) mainly due to higher CPO prices (+28%), outstripping a decline (-6%) in FFB output. QoQ, 3QFY20 CNP rose (+97%) lifted by higher CPO price (+15%) and seasonally higher FFB output (13%). This resulted in a 406% improvement in plantation PBT.

Downside to CPO price. Management believes that CPO price should trade in the range of RM2,500-2,600/MT for 1HFY21. This is in line with our CY21 CPO price forecast of RM2,600/MT, and we make no changes to our forecast. More aggressive fertilizer application is expected in 4QFY20 given that 9MFY20 accounted for 68% of full-year target. This however, is conditional on the weather. On production, the group recorded its highest FFB yield of 5.32MT/ha in 3QFY20. Moving into 4QFY20, management expects yield to dip to 4.60- 4.80MT/ha. This effectively works out to an FFB output of c.1.16-1.21m MT in 4QFY20, which is 25-30% higher when compared against our expected 929k MT, prompting us to revisit our estimates.

Raise FY20E/FY21E earnings by 46%/13% on better FY20-21E FFB outlook of -3%/+3% (vs. -7%/+6% previously).

Maintain MARKET PERFORM with a higher TP of RM1.25 (from RM1.20) based on an unchanged FY21E PBV of 1.0x, reflecting -0.5SD (in line with peers) valuation. While earnings outlook remains robust for FGV, we believe -0.5SD valuation is fair, in view of: (i) anticipated downside bias for CPO prices, (ii) on- going LLA uncertainty, and (iii) 20% share price rally since the low in October. At current, FGV is traded at FY21E PBV of 1.0x (12% discount to peers’ average) leading us to believe that market has priced in the negatives and hence, warranting a MARKET PERFORM call. Risks to our call include: (i) higher/lower-than-expected CPO price realized, and (ii) adverse weather impact on production.

Source: Kenanga Research - 18 Nov 2020