Following a sector-wide CPO price  downgrade, we  lower  our earnings projections for  FGV  by  19.7% for  FY14  and  25.1% for FY15  as well as reduce  our  SOP-based  FV  to  MYR3.68  (from  MYR4.55).  We  believe FGV’s outlook will remain unexciting unless it is able to boost earnings via  earnings-accretive  acquisitions  and  extract  synergies  from  its previous acquisitions. Downgrade to NEUTRAL (from Buy).

Downgrading  sector-wide  CPO  prices.  We  are  downgrading  the Malaysian  plantation  sector  to  NEUTRAL  (from  Overweight)  and lowering  our  CPO  price  assumptions  to  MYR2,400/tonne  (from MYR2,700) for CY14 and MYR2,500/tonne (from MYR2,900) for CY15.  

Palm oil prices close to bottom. We believe palm oil prices are weeks away from a bottom and should strengthen in 4Q as well as  CY15.  As the  currently  low  levels  will  pull  down  the  full  year  average,  we  are cutting our assumptions. 

We  expect  prices  to  strengthen  in  4Q14  and  2015,  due  to:  i)  the seasonal slowdown in production  in 4Q14, which  has, since  year  2000, seen  CPO  prices  jump  11%  from  end-Sept  to  end-Dec;  ii)  the  slowerthan-expected  off-take  for  biodiesel  in  Indonesia  in  2014   which  was caused  by  pricing  issues  is  no  longer  applicable,  while  distribution infrastructure,  which  is  being  developed,  should  see  Indonesia’s  B10 programme in full swing  in 2015; and  iii) the downside for soybean price is limited as it is already trading at or near production cost. Although the stock/usage ratio will be high this year (>30%) due to  a  bumper crop in 
the US, such a high stock/usage ratio usually does not persist. 

Reducing forecasts.  We are reducing  our forecasts for  FGV  followingthe sector-wide 19.7% price cut  for FY14  and 25.1% for FY15. Our CPO price  assumptions  now  stand  at  MYR2,400/tonne  for  FY14  (from MYR2,700) and MYR2,500/tonne for FY15 (from MYR2,900). 

Downgrade  to  NEUTRAL.  Post  earnings  revision,  we  cut  our  SOPbased FV  to MYR3.68  (from MYR4.55)  by applying an unchanged 18x CY15  target  P/E  to  the  group’s  plantation  subsidiaries  and  associate contributions,  12x  CY15  for its  manufacturing  division,  and  a  MYR5.23 FV  for  51%-owned  MSM  Holdings  (MSM  MK,  NEUTRAL).  We  believe FGV’s outlook will remain unexciting unless it is able to boost  earnings via earnings-accretive acquisitions and  extract synergy from its previous acquisitions.  In  terms  of  earnings  sensitivity  to  CPO  prices,  every MYR100/tonne change in CPO price will affect  FGV’s earnings by  4-6% per annum.

Source: RHB