INVESTMENT HIGHLIGHTS

• 1QFY19 core earnings of RM11.0m came in above our expectations

• Downstream segment recorded higher PKO processing margin and PME (Biodiesel) sales which supported earnings

• FY19 earnings forecasts revised upward in view of higher FFB production growth and lower production cost

• Maintain NEUTRAL with a revised TP of RM1.26

Above expectations. FGV Holdings Berhad’s (FGV) 1QFY19 normalised earnings of RM11.0m was above our expectation. This was mainly attributable to operational cost savings and higher contribution from downstream segment. Our core earnings calculation excludes (i) RM86.4m net LLA accounting charge, (ii) Reversal of impairment of financial assets (net) of RM47.5m, and (iii) forex gain of -RM3.4m.

Plantation division remains profitable in 1QFY19. Plantation division managed to grow its profit before zakat and tax (PBZT) by 110.0%yoy to RM40.0m despite the current weak CPO price environment. This was boosted by the downstream segment with a record PBZT of RM96.0m due to (i) Higher RBDPKO margin of RM224/mt vs –RM51.0/mt in prior financial period and (ii) Higher biodiesel sales which grew by +58.0%yoy to 16.0k metric tonnes. In addition, the lower ex-mill CPO cost achieved at RM1,379/mt (-20.2%yoy) via operational improvements also help to partially offset the fall in CPO price (-20.0%yoy).

Underperformance from other divisions. Sugar division has posted a LBZT of –RM2.9m as compared to RM22.0m profit in previous financial period due to lower ASP of refined sugar amid stiff competition and higher refining costs from MSM Johor sugar refinery. Meanwhile, logistics and support businesses (LSB) sector registered a LBZT of -RM16.8m due to the mutual separation scheme provision and impairment of receivables of RM25.0m and RM16.0 respectively.

Earnings estimate. Revised upwards our FY19 forecast core earnings to RM56.9m in view of the lower average CPO production cost, higher FFB production growth and improved margin at the downstream segment of plantation sector.

Source: MIDF Research - 30 May 2019