KEY INVESTMENT HIGHLIGHTS

• 4QFY19 turned profitable to a normalised earnings of RM89.9m (+140.7%yoy)

• FY19 normalised losses narrowed to -RM85.2m which came in above our and consensus expectations

• This is mainly attributable to the elevated CPO price and the gradual recovery of the sugar business

• However, the COVID-19 and geopolitical uncertainties continue to dampen demand

• Maintain NEUTRAL with a revised TP of RM1.18

Above expectation. FGV Holdings Berhad’s (FGV) reported 4QFY19 profit of RM89.9m (+140.7%yoy) due to the higher CPO price and narrower losses for its sugar business. Meanwhile, the group’s FY19 normalised losses narrowed by +67.2%yoy to -RM85.2m after excluding the impairment loss of about -RM164.2m. The lower losses were primarily attributable to (i) higher CPO price in 4QFY19 (increased by +6.8%yoy to RM2,159/mt), (ii) improved operational efficiency, (iii) lower losses from its sugar business in 4QFY19. This came in above our and consensus’s expectation of the FY19 earnings forecasts respectively.

Transformation plan yielding results. The group’s improving operational efficiencies have been evidenced in several ways that are contributing a turnaround. In FY19, FGV’s FFB and CPO production growth grew +6%yoy and +9%yoy respectively (refer to table 3) which outperformed the national growth of +2%yoy. Through operational improvements, the cost of production (ex-mill) reduced by -17%yoy to about RM1,503/mt in FY19 which is expected to be improved to the range between RM1,400-1,500/mt in FY20. In addition, other operating expenses have also trimmed by -77.1%yoy to RM191.3m. Moving forward, we opine that the sustainable improvements with higher CPO price would contribute to a better financial performance ahead.

Diversification via integrated farming and renewables. To recall, the group has acquired a 60.0% equity stake in Red Agri Farm Sdn Bhd to venture into the dairy faming business and fresh milk processing. The group’s PKC-based animal feed sales also increased +113.0%yoy to 21,645mt in FY19. Moreover, the group also plans to continually invest in cash crops and paddy farming businesses in FY20. Meanwhile, the group’s renewable business has achieved a PBT of RM42.0m in FY19 and it plans to commercialise more by-products for end-users in FY20. In terms of its sugar business, MSM aims to export more sugar-related downstream products to major markets. Thus, we are of the view that the increased diversification will help the group to have a more sustainable earnings quality moving forward.

Source: MIDF Research - 2 Mar 2020