Double trouble. 3Q12 results, to be released at the end of this week, are likely to disappoint as low FFB production growth of just 4% QoQ in and an 11% QoQ drop in spot CPO ASP take their toll. Consequently, FGVH is likely to post weaker QoQ core net profit of ~MYR190m (2Q12: MYR219m), bringing 9M12 core net profit to MYR609m, just 58% of our full-year forecast. We leave our earnings forecasts unchanged for now. Our HOLD call and TP of MYR5.20, based on 15x mid-CY13 PER, are under review.

Slow FFB recovery in 3Q. FGVH’s FFB production grew at a surprisingly slow pace of +4% QoQ in 3Q12 to 1.21m tonnes. 9M12 FFB production of 3.52m tonnes (-7% YoY) met just 69% of our FY12 forecast. Its recently-announced Oct 2012 output bumped up 10M12 FFB production to 3.96m tonnes or 77% of our FY12 forecast, but this still lags our expectations. Trees stress lingers. With two months left in the year, we may have to review our forecast of the contraction in FGVH’s FFB production in 2012 to 7% YoY (currently -2% YoY).

Hit by weak CPO ASP too. CPO prices plunged from ~MYR3,000/t to below MYR2,400/t during 3Q, averaging MYR2,851/t for the quarter. This brings 9M12 MPOB spot CPO ASP to MYR3,096/t. With spot CPO at ~MYR2,300/t, we have downgraded our industry-wide 2012 CPO ASP assumption to MYR2,950/t (-6%, from MYR3,150/t).

Other divisions. FGVH’s sugar and its North American downstream operations are expected to deliver relatively stable profits in 3Q. We also expect lower financial expenses in 3Q due to the largely unutilised MYR4.4b in cash proceeds raised at its IPO at end-2Q. The uncertainty lies with the performance of its 49% associate Felda Holdings Bhd (FHB). Although FHB’s earnings should improve on higher utilisation of its 20.4m tpa milling capacity in 3Q, this could be offset by potential refining losses and an inventory writedown at its palm oil refineries in Malaysia (total capacity: ~2.5m tpa) if these refineries fail to take timely action to hedge against a 14% decline in palm olein prices in 3Q.

Source: Maybank Research - 26 Nov 2012