Review

• FGV’s FY16 results come in within our expectation but below consensus’ full year forecast. Reported net profit declined by 84.3% to RM29.6mn mainly due to lower CPO production, higher raw sugar costs, impairment and losses suffered by the jointly controlled entity.

• Excluding the Land Lease Agreement (LLA), forex and other non-core items, the group’s core net loss ballooned to RM239.1mn, attributable to higher production costs, higher raw sugar costs and interest cost.

• Plantation: Despite lower FFB production(-15.5% YoY), FY16 PBT increased by 14.9% YoY to RM541.4mn mainly attributable to higher CPO selling price of RM2,560/tonne (+15.8% YoY) and lower LLA charge of RM68.3mn (vs FY15: RM224.9mn). OER was lower at 20.68% compared to 20.91% in FY15. Meanwhile, the average CPO production cost (ex-mill) has increased by 17.9% YoY to RM1,624/tonne.

• Downstream: The downstream segment recorded an LBT of RM52.9mn compared to a profit of RM27.9mn in FY15. The weak results were mainly due to lower margin in RBDPKO and CPKO from kernel crushing activities, impairments and start-up losses from the refining plant in Pasir Gudang (packed product business).

• Sugar: Due to higher raw sugar cost and weakening of Ringgit, the sugar segment PBT declined by 58.7% to RM165mn despite strong volume for domestic sales (+23.7%).

• Trading, Marketing, Logistics and Others (TMLO): Lastly, this division produced a PBT of RM13.3mn for FY16 as compared to a LBT of RM30.1mn in the same period last year. The better performance was a result of higher margin and lower forex loss in trading activities.

• No dividend was declared during the quarter until the audited financial accounts has been finalized. We expect the group to pay a DPS of 4sen for FY16.

Highlights from Analysts’ briefing

• Expects FFB production to increase by 15% to 4.5mn tonnes.

• Production cost (ex-mill) is expected to reduce by 9% to RM1450/tonne.

• Replanting target of 15k ha for FY17.

• Expect no further savings from the admin cost. Thus, the admin cost is expected to remain flattish on YoY basis. Note that the admin cost has reduced by RM127.4mn in FY16, which was higher than the initial target of RM100mn.

Impact

• We tweak our FY17 and FY18 earnings forecast higher by 1.4% and 0.8% respectively after imputing FY16 figures into our financial model.

Valuation

• Main Sell on FGV with an unchanged TP of RM1.53, based on sum-of-parts valuation. Our TP implies a CY17 PER of 24x.

Source: TA Research - 1 Mar 2017