KEY INVESTMENT HIGHLIGHTS

• 9MFY19 normalised losses narrowed to -RM247.6.m which came in below our and consensus expectations

• Improving fundamentals of its plantation sector amidst the recovery of CPO price to help support earnings momentum

• Intention to dispose the loss-making Trurich and MSM’s Johor refinery should bode well for the group’s well-being

• However, huge losses from its sugar sector continues to plague the group

• Maintain NEUTRAL with a revised TP of RM1.20

Expecting a better 4QFY19 results. FGV Holdings Berhad’s (FGV) 3QFY19 normalised losses narrowed to -RM247.1m (+70.9%yoy) mainly stemming from the plantation business as the sugar business continues to underperform. Meanwhile, the group’s cumulative 9MFY19 normalised losses improved by +71.1%yoy to -RM247.6m. However, this came in much worse than anticipated. This was primarily attributable to the declining ASP of CPO and CPKO and the underperformance of its sugar business. Nonetheless, the recent hike of CPO price to above RM2,500/mt and improving operational performance to support the earnings growth momentum in the coming quarters.

Stronger fundamentals to cushion lower CPO price. The group continues to achieve better operational performance at its plantation sector which help to partially mitigate the low CPO price. Note that the group’s average selling price (ASP) of CPO as of 9MFY19 fell by - 17.0%yoy to RM1,975/mt. In addition, the improvement in its 9MFY19’s FFB production (+12.0%yoy) and yield (+17.0%yoy) as well as lower CPO cost of production (ex-mill) (-22.0%yoy) indicated in Table 3

managed to lend to the increase in revenue marginally by +1.0%yoy. This led to a narrowed 9MFY19’s PBZT of RM-87.0 as compared to - RM877.0m in 9MFY18 period at its plantation sector. Note that the group’s FFB production growth remains one of the highest among its peers in the industry. Moving forward, we opine that the improvement in the plantation business’ fundamentals would contribute to a better financial performance ahead.

Potential m&a serves as catalysts. The management has guided that it has already commence discussion to dispose its 50%-owned lossmaking Trurich entity which has reduced the group’s FY18 financial performance by -RM84.0m. Management guided that the valuation of Trurich is approximately one billion Ringgit. However, given the subdued market sentiment, we view that management would need to provide a satisfactory discount to entice the interested party. Moreover, the management continues to seek strategic buyers for up to 70.0% of its stake in MSM’s Johor refinery. Note that the refinery has been running at a mere 20% utilization rate which contributes to a higher refining cost. The partial sale would help to ease the financial burden due from its sugar sector.

Source: MIDF Research - 29 Nov 2019