KEY INVESTMENT HIGHLIGHTS

• 3QFY20 normalised earnings jumped +154.8%yoy to RM135.3m, mainly driven by higher CPO price and higher FFB production
• 9MFY20 results turned profitable at RM19.0m (+106.2%yoy) which was within ours but above consensus expectation
• Steady earnings momentum to be underpinned by resilient FFB production as well as favourable CPO price
• Sugar business is expected to post lower losses
• Uncertainty of LLA on future business direction remains a key risk
• Maintain NEUTRAL with a revised TP of RM1.27

Second consecutive profitable quarter. FGV Holdings Berhad’s (FGV) posted 3QFY20 normalised earnings of RM135.3m as compared to losses of –RM247.1m in 3QFY19. This was primarily premised on higher earnings contributions from its plantation segment driven by higher CPO price of RM2,645/mt (+33.0%yoy) and higher FFB production of 1.3m mt (+9%yoy). Cumulatively, 9MFY20 results turned positive at RM19.0m due to the bump in earnings from the plantation sector and lower losses from the sugar segment. This came in within our but above consensus’s expectation of the FY20 earnings forecasts respectively. Moving forward, we foresee a better 4QFY20 financial performance on elevated CPO prices and narrowing losses from its sugar segment.

Strong FFB output. In 3QFY20, the group’s FFB production increased by +9.0%yoy to 1.3m metric tonnes (mt), showing continued recovery in output during the seasonally peak production cycle. This came in above industry average of +6%yoy. Nonetheless, 9MFY20 FFB production still came in lower at 3.2m mt (-6%yoy) which was mainly led by the significant reduction in 1QFY20 FFB production (-33.0%yoy). 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 exmill cost of production increased by +10.0%yoy to RM1,591/mt. However, the higher cost structure was partially compensated by higher average selling price (ASP) of CPO of RM2,536/mt (+28.0%yoy). We expect the group 4QFY20 FFB production to remain at similar level with 3QFY20 in view of the partial lockdown in Sabah, labour shortage, and La Nina weather disrupting operations. This could limit the benefit from higher CPO price.

Losses from sugar segment narrowed. We opine that the higher 9MFY20 sales volume of 698.2k mt (+5.0%yoy) was a display of resiliency despite the Covid-19 outbreak and movement control order. It was attributable to the better volume in Industry and Export segments as well as higher Export premium. Nonetheless, it was partially moderated by the marginally lower ASP of refined sugar (-0.3%yoy).

This has resulted the sugar segment to incur a narrowed LBT (refer to table 1). Moving forward, we opine that with an increasing utilisation rate at MSM Johor and higher export sales volume, FGV could potentially observe a gradual recovery from its sugar segment in 4QFY20 and going into FY21 albeit domestic demand could be dampened by lockdowns.

Uncertainties remain for FGV’s future direction. We opine that there are several issues that are placing the group in an unfavourable light. Firstly, the ban on the group’s palm oil by the United States (accounts for <5% of total revenue) on alleged unfair labour practices might potentially have negative spill-over effects in the longer term in which the group is currently actively resolving. Secondly, the Malaysian government’s decision in supporting the termination of LLA is casting a shadow on FGV’s position as one of the biggest plantation companies. Moreover, the possibility of a takeover of FGV’s mills by Felda will potentially jeopardise FGV’s business prospects although such scenario is premature at this juncture. We also postulate that it is still early to assess the possible impacts on the termination of LLA, depending on the outcome of the negotiation phase. Meanwhile, the group has also received an expression of interest from Perspective Lane to inject its plantation assets into the group and potentially becoming its single largest shareholder at the same time which, in our view, could face major hurdles from multiple fronts.

Earnings forecast. We are revising our earnings forecast for FY20/21/22 to RM99.7m, RM311.4m and RM350.4m respectively given the higher forecast ASP of CPO price and better financial performance from its sugar segment.

Target Price. We are maintaining our target price of RM1.27 (previously RM1.18). This is based on pegging FY21 BVPS of RM1.27 to an unchanged PBV of 1.0x which is about the group’s 5-year historical average.

Maintain NEUTRAL. The group’s 9MFY20 results have been encouraging as it returned to profitability, mainly premised on higher CPO prices and resilient FFB output. We are comforted with the current progression on the group’s turnaround plan to improve its business fundamentals as reflected in its second consecutive profitable quarters. Moving forward, we opine that the favourable CPO price in 4QFY20 coupled with a modest FFB production to generate a better financial performance for the group. Moreover, 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 into FY21. 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 4QFY20. This is expected to bode well for FGV. However, we reiterate our cautious stance on the much uncertainties shrouding the group’s business positioning and operating model in view of the imminent termination of LLA and potential takeover of its mills. The group’s downstream segment could also be under pressure from lower demand for biodiesel given the wide POGO spread and higher raw material costs moving forward. 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 - 18 Nov 2020