Though we believe FGV’s outlook will remain bleak unless it is able to boost earnings via earnings-accretive acquisitions and extract synergy from its previous acquisitions, we believe valuations have fallen to fair levels,  given  its  39%  share  price  drop  over  the  last  1.5  months.  We upgrade to NEUTRAL (vs Sell), with lower TP of MYR2.20. We also made earnings adjustments for the flood impact and its APL acquisition.

Lowering  FY14  FFB  production  projection  for  flood  impact.  YTDNov  2014,  Felda  Global  Ventures’  (FGV)  FFB  production  was  down 3.2%  YoY,  ie  lower  than  our  projected  0.7%  decline  for  FY14. Management  clarified  that  up  to  end-Dec  2014,  the  floods  in  the  East Coast affected 23,730ha (or 6.7% of its planted estates), and estimated FFB  lost  was  about  11,000  tonnes.  Assuming  Dec  2014’s  FFB production  is  down  a  conservative  15%  MoM  from  Nov  2014  on  the flood’s  impact, FGV could end the year with  FFB production down about 5%.  We are adjusting our forecasts to reflect this projection for FY14. For FY15-16, we leave FFB growth unchanged at 0-2% per year.

Incorporating  Asian  Plantations  (APL)  acquisition  from  FY15.  We expect to see the impact of FGV’s  PL  acquisition coming through  from 1Q15,  ie  once  the acquisition  is  completed. As  mentioned in our earlier reports, we expect the immediate earnings impact of this acquisition to be  negative,  given  that  APL  is  a  loss-making  entity.  We  project  the immediate impact to FGV’s bottomline to be  a negative 9-10% for FY15-16,  after taking into account the interest income foregone,  given APL’s MYR448m  debt.  In  the  longer  term   (post  FY17),  however,  the  impact should  be  positive,  once  the  trees  are  older  (current  average  is  fiveyears).  We have now incorporated the impact of this acquisition into our forecasts from FY15 onwards. 

Upgrade  to  NEUTRAL.  All  in,  we  have  cut  our  earnings  forecast  for FGV by 5.4% for FY14 and 9-10% for FY16-17. As a result, we cut our SOP-based  TP  to  MYR2.20  (from  MYR2.80),  implying  2.3%  upside. While  we  believe  FGV’s  outlook  will  remain  bleak  unless  it  can  boost earnings via earnings-accretive acquisitions and extract synergy from its previous  acquisitions,  we  think  valuations  have  fallen  to  fair  levelsalready  –  we note its  recent share price drop of  39%  over  the last  1.5months. As such, we upgrade our recommendation to  NEUTRAL  (from Sell). We highlight that every MYR100/tonne change in CPO price could affect its earnings by 4-6% per annum.

Source: RHB