KEY INVESTMENT HIGHLIGHTS

• 1QFY20 losses widened to -RM135.7m which came in below our and consensus expectations

• This was mainly attributable to the sharp decline in FFB ouput (-33.0%yoy) and higher cost of production (+58.0%yoy)

• Expecting turnaround in 2HFY20, supported by strong recovery in FFB production as well as favourable CPO price

• Sugar business is expected to perform better, post streamlining of production activities to Johor and Prai

• Maintain NEUTRAL with a revised TP of RM1.02

Below expectation. FGV Holdings Berhad’s (FGV) reported 1QFY20 normalised losses of -RM135.7m as compared to -RM3.0m in 1QFY19, mainly due to higher losses from its plantation and sugar segment (refer to table 1). This came in below our and consensus’s expectation of the FY19 earnings forecasts respectively. The larger-than-expected losses from the plantation and sugar segments were largely stemming from the plunge in FFB production (-33.0%yoy) and higher cost associated with the MSM Johor plant respectively. Moving forward, we foresee a challenging 2QFY20 financial performance due to the movement control order (MCO) before rebounding in the second half of the year.

Precipitious drop in FFB output. The significant reduction in FFB production (-33.0%yoy) in 1QFY20 had caused the group to incur a larger loss before tax (LBT) of -RM153.0m as compared to -RM12.0 in 1QFY19 of its plantation segment (refer to table 2). This was predominantly attributable to the impact of dry weather conditions in CY19, especially in Sabah where a third of FGV’s estates are situated as well as lower application of fertiliser. As a result, the ex-mill cost of production jumped by +58.0%yoy to RM2,177/mt. However, the loss was partially compensated by higher average selling price (ASP) of CPO of RM2,669/mt (+34.4%yoy). The management’s guidance of the completion of 25% of its full year fertiliser application in 1QFY20 as compared to 3% in 1QFY19 would also help with improving the FFB yield going forward. Thus, we opine that an anticipated recovery in FFB yield with a healthy CPO price would contribute to a better financial performance ahead.

Losses from sugar segment widened. Albeit with higher 1QFY20 sales volume of 235.9k mt (+5.0%yoy) and ASP of refined sugar (+1.0%yoy), the lower gross margin has resulted the sugar segment to incur a larger LBT (refer to table 1). The lower margin was primarily caused by the higher refining cost due to increase in fuel cost, depreciation as well higher finance cost associated with MSM Johor. Nonetheless, we opine that with the closure of MSM’s Perlis that could lead to an increase in utilisation rate of MSM Johor coupled with the increase in ASP of its sugar products, FGV could potentially observe a gradual recovery from its sugar segment.

Source: MIDF Research - 29 May 2020