INVESTMENT HIGHLIGHTS

• FGV is seeking strategic collaboration for its sugar business via sale of about half of its 51% stake in MSM

• The move would most likely enable MSM to strengthen its foothold and venture further in China or Indonesian market

• Earnings forecasts remain unchanged

• Reiterate BUY with an unchanged TP of RM1.40

Sale of its MSM’s stake. FGV Holdings Berhad (FGV) is looking to sell part of its 51% stake in MSM Malaysia Holdings Berhad (MSM) as part of its rationalisation plan. MSM is currently facing with possible worsening financial performance in view of the domestic refined sugar glut and stiff competition amidst the liberalisation of the sugar industry. This would have a negative impact on FGV’s profitability going forward.

Seeking strategic partnership. We understand that the group is looking for a strategic equity partner for MSM rather than completely exiting the sugar business. According to the Edge Financial Daily, the group is engaging with at least four companies including international players in the sugar industry to dispose approximately half of its 51% stake. The four interested parties include: (1) JAG Capital S/B, (2) Wilmar International Ltd, (3) an unnamed Indonesian company, and (4) an unnamed Chinese company. This indicates that both FGV and MSM are looking to expand into mass export markets like China and Indonesia via strategic collaboration with respective local players.

View. We are positive on the news as it would potentially alleviate the precarious situation that MSM is in at the moment. Should a synergistic strategic equity partnership for MSM materialises, we would most likely observe an improvement in profitability for FGV. Assuming the collaboration could benefit MSM in strengthening its foothold in the domestic market or as a conduit to venture further into the international arena. Either way, it would help in easing the MSM’s excess refinery capacity of approximately one million metric tonnes from its new refinery in Johor. To recall, we are expecting MSM to be in a loss-making position for FY19 and FY20. This is mainly premised on: i) expectancy of weak average selling price, ii) global sugar glut, and iii) implementation of sugar tax on soft drinks and juices.

Another potential scenario. Assuming the pursuit of strategic alliance for MSM is scrapped, we do not discount the possibility that FGV would be selling off the MSM Johor sugar refinery to improve its cost structure going forward. This is in view of its low utilisation rate at about 30% and an upward revision of gas tariff which contributed to higher refinery cost at about RM350-400/mt. Coupled with an oversupply of refined sugars and price war in the domestic market, continuing the refinery would only place further downward pressure on MSM’s profit margin and adversely affect FGV’s profitability. The focus could then be diverted into enhancing MSM’s downstream segment business.

Earnings estimate. Pending further development, we are making no changes to our earnings forecasts.

Target Price. We are maintaining our target price of RM1.40 by pegging its FY20BVPS of 1.27 to PBV of 1.1x which is the group’s 5-year historical average.

Maintain BUY. We remain optimistic on FGV for its relentless focus and execution of its transformation plan for the group to turnaround. The outlook of better profit contribution from its sugar business would be promising if the group is able to secure a strategic partner that provides synergistic opportunities into the international sugar market. Should MSM remains in loss-making position, the reduced stake could help in enhancing FGV’s earnings quality. Earlier this month, the group has also announced the disposal of its loss-making entity, FGV China Oils Ltd in China which is expected to be completed in early FY20. Nonetheless, the group is seeking to continually expand into the Chinese market via exporting potential higher-margin palm oil and sugar downstream products. We are also of the view that the group could venture further into the downstream segment inorganically. Coupled with its continuous focus on operational efficiency, we believe the group could partially mitigate the current challenging CPO price environment. All factors considered, we are maintaining our BUY recommendation on FGV. Meanwhile, pending further development, we are maintaining our SELL recommendation on MSM with an unchanged TP of RM1.07.

Source: MIDF Research - 29 Jul 2019