Review

• FGV’s 1HFY9 results came in within our but below consensus expectations. Excluding the impact of the Land Lease Agreement (LLA), forex and other non-core items, core net loss widens to RM81.8mn compared to a loss of RM73.5mn in 1HFY19. The weaker earnings were mainly due to lower commodity prices, losses in the sugar sector, higher finance costs and tax rate.

• Plantation: 1HFY19 FFB increased by 11.6% YoY to 2.2mn tonnes with yield stood at 9.14 tonnes/ha compared to 7.93 tonnes/ha recorded last year. The group reported a LBT of RM14.3mn compared to a PBT of RM26.8mn in 1HFY18. The weak earnings was mainly due to lower CPO price at RM1,972/tonne (-19.4% YoY). Excluding the reversal of impairments of RM56mn (due to settlements received from customers) and a fair value change in LLA, the group would have recorded a LBT of RM11.9mn. CPO production increased by 17.2% to 1.5mn tonnes. Average production cost (ex-mill) dropped by 24.2% YoY to RM1,416/tonne.

• Sugar: This division reported a LBT of RM56.0mn compared to a PBT of RM49.9mn in the previous year. The poor results were mainly dragged by higher finance cost for the Johor refinery (commercialization started in April 2019), lower average selling price and sales volume (-3.4% YoY) as a result of increased APs to import refined sugar and lower export volume.

• Logistics and Others: Lastly, this division reported lower profit of RM26.3mn (-31.3% YoY) mainly due to the provisions of the Mutual Separation Scheme (MSS) and impairments on overdue balances in line with MFRS 9 requirements.

• No dividend was declared during the quarter under review.

Some Key-Highlights from management:

• Management expects CPO prices to be traded in the range of RM2,000- RM2,200/tonne in 2H.

• The replanting target has been adjusted to 11k ha from 15k ha for FY19.

• On the other hand, the group is still seeking buyers to sell Trurich Resources Sdn Bhd (at 50:50 joint-venture company with Lembaga Tabung Haji) and hopes to complete the deal by the end of September. The carrying value is estimated to be around RM1bn.

• Meanwhile, management guided that the group is still looking to dispose of part of its 51%-stake MSM Holdings Bhd. However, the group is seeking for a strategic partner, which will complement and strengthen MSM’s existing business and can help to expand its overseas market by penetrating into China and Indonesia’s market.

• The director remuneration issue is still ongoing and management hope to resolve the issue in the next EGM.

Impact

• No change to our earnings forecasts.

Valuation

• FGV’s TP remains unchanged at RM1.03, based on 10% discount to its CY20 P/BV. FGV’s share price has corrected by almost 28% from its recent peak of RM1.31. With a potential upside of 8.4%, we upgrade the stock to HOLD from sell.

Source: TA Research - 29 Aug 2019