What’s New

• 4Q/FY16 core losses wider than expected

• Stronger CPO ASPs offset by volume declines, dragged by weaker Sugar arm earnings

• Expects continued higher CPO prices to support bottomline as more cost measures are explored

• Lift FY17/18F forecasts by 3%, TP remains at RM1.65, maintain FULLY VALUED

No easy path to recovery

Not yet optimistic. FGV saw core losses widen in FY16, as higher average CPO selling prices were partially offset by 14% decline in CPO production volume; while sugar unit MSM Malaysia saw PBT contribution drop by more than half due to escalating raw material costs. We think earnings risks remain elevated if MSM’s performance does not rebound sharply; while also remaining conservative on its volume rebound given the secondary effects of the earlier El Nino. Maintain FULLY VALUED.

Core plantations segment has room to improve. FGV’s internal FFB volume fell 16% in FY16 due to the El Nino impact in 2015, contributing to a 14% decline in CPO volumes. The group is targeting an FFB output rebound of up to 15%, though we remain cautious on this front given that dry weather may be prolonged; especially as the group does not have a sizeable maturity pipeline.

Risk factors remain despite improvement efforts. Key sugar- manufacturing unit MSM Malaysia saw PBT decline 59% in FY16 from higher raw sugar costs, thus creating a drag on FGV earnings as it had previously contributed >100% of group pretax profits (due to losses in other aggregated divisions). The persistence of these conditions will stymie any chances of sustainable profitability.

Valuation

Our DCF-based TP is RM1.65, which takes into account our CY17/18 CPO price forecasts of RM3,040/RM3,030 per MT. Maintain FULLY VALUED.

Key Risks to Our View

A consistent showing of profitability above our forecasted levels may provide the fundamentals to support its share price.

Source: Alliance Research - 1 Mar 2017