KEY INVESTMENT HIGHLIGHTS

• 2QFY20 financial results turned a profit of RM21.7m, mainly driven by higher CPO price (+18.0%yoy)
• Cumulatively, 1HFY20 results remained in the red of circa – RM116.3m which was within our and consensus expectation
• Profitability to sustain in 2HFY20, underpinned by strong recovery in FFB production as well as favourable CPO price
• Sugar business is expected to post lower losses
• Maintain NEUTRAL with a revised TP of RM1.22

Turned profitable. FGV Holdings Berhad’s (FGV) reported 2QFY20 normalised earnings of RM21.7m as compared to losses of –RM48.7m in 2QFY19. This was primarily premised on earnings contributions from its plantation segment as CPO price increased to RM2,309/mt (+18.0%yoy) during the quarter under review. Cumulatively, 1HFY20 results remained in negative territory of –RM116.3m losses due to the larger-thanexpected losses from the plantation and sugar segments in 1QFY20. This was due to the plunge in FFB production (-33.0%yoy) and higher cost associated with the MSM Johor plant respectively. However, this came in within our and consensus’s expectation of the FY20 earnings forecasts respectively. Moving forward, we foresee a better 2HFY20 financial performance on higher FFB production, elevated CPO prices and narrowing losses from its sugar segment.

Stronger FFB output in 2H20. During 2QFY20, the group’s FFB production increased by +3.0%yoy to 1.2m metric tonnes (mt), showing first sign of recovery in output. Cumulatively, the lower 1HFY20 FFB production of 1.9m mt (-14%yoy) was mainly stemmed from the significant reduction in FFB production (-33.0%yoy) in 1QFY20. This was predominantly attributable to the impact of dry weather conditions in FY19, 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 +21.0%yoy to RM1,711/mt. However, the loss was partially compensated by higher average selling price (ASP) of CPO of RM2,453/mt (+24.0%yoy). The management’s guidance of the completion of 40% of its full year fertiliser application in 1HFY20 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 narrowed. We opine that the marginally lower 1HFY20 sales volume of 445.1k mt (-0.2%yoy) was a display of resiliency despite the Covid-19 outbreak and movement control order. It was also partially mitigated by the higher ASP of refined sugar (+0.4%yoy) which has resulted the sugar segment to incur a narrowed LBT (refer to table 1). Moving forward, 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 in 2H20 given the steady increase in its sugar prices.

Profitability in coming quarters could be sustained in 2H20. In view of the anticipated better FFB yield and CPO price with potential easing of lockdowns globally in second half of the year, we reaffirm our view that the group could sustained its turnaround trajectory in 1H20. Note that the group’s continued diversification plan into downstream consumer products especially to India through partnership with a local company and signing of a distributorship agreement with My Agro Hub Resources of 30mt of animal feed monthly could continue to strengthen its downstream food FMCG business. In addition, the higher ASP of refined sugar and potential higher sales volume at its sugar segment would support the group to sustain its profitability as well. Nonetheless, we believe that the turnaround could be met with headwinds should there be any resurgence of Covid-19 outbreak and extended lockdowns.

Earnings forecast. We are making no changes to our earnings forecast.

Target Price. We are revising a new target price of RM1.22 (previously RM1.02). This is based on pegging FY21 BVPS of RM1.02 to a higher PBV of 1.2x (from 1.0x) which is about +0.5SD premium to the group’s 5-year historical average. The higher PBV is mainly reflective of the group’s diversification into the downstream consumer products segment and geographical expansion.

Maintain NEUTRAL. The group’s 2QFY20 results have been encouraging as it returned to profitability, mainly premised on CPO prices and resilient FFB output during the quarter-under-review. However, financial performance for 1HFY20 remained in the red due to the sharp fall in FFB production in 1QFY20, resulting in large losses. Moving forward, we expect the group’s aggressive fertiliser application during the same period could help to improve the FFB yield going forward and thus resulting in better CPO sales. Moving forward, we opine that the resumption of favourable CPO price in 2HFY20 coupled with a better FFB production and a potential recovery in demand to generate a better financial performance for the group. In addition, the anticipated higher ASP of refined sugar and increase in sales volume should be able to help MSM to further reduce its losses in 2HFY20. This is expected to bode well for FGV. All factors considered, we are maintaining our NEUTRAL recommendation on FGV. Nonetheless, we do not discount the possibility of an execution risk which is dependent on the development surrounding the Covid-19 pandemic.

Source: MIDF Research - 25 Aug 2020