Review

• FGV returned to the black in 3QFY19 and registered a core net profit of RM55.0mn. The improvement was mainly due to higher CPO production (+5.7% QoQ, +20.8% YoY), improved earnings contribution from JVs and better margin in the downstream sector.

• Excluding the impact of the Land Least Agreement (LLA), forex and other non-core items, 9MFY19 core net loss narrowed to RM26.9mn, vi's-à-vi's to a loss of RM121.2mn in the previous year. The result came in above expectations.

• Plantation: 9MFY19 FFB increased by 12.4% YoY to 3.4mn tonnes with yield stood at 14.26 tonnes/ha compared to 12.24 tonnes/ha recorded last year. The group reported a LBT of RM87.3mn compared to a LBT of RM876.9mn in 9MFY18. The weak earnings was mainly due to lower CPO price at RM1,983/tonne (-10.8% YoY). Excluding the impairment losses, the group would have recorded a LBT of RM58.3mn compared to RM98.9mn recorded a year ago. CPO production increased by 18.4% to 2.4mn tonnes. Average production cost (ex-mill) dropped by 22.3% YoY to RM1,447/tonne.

• Sugar: This division reported a LBT of RM276mn compared to a PBT of RM71.5mn 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 as a result of increased APs to import refined sugar, impairment of RM145mn for PPE and higher refining cost.

• Logistics and Others: Lastly, this division reported lower profit of RM21.6mn (-62.1% YoY) mainly due to provisions of the Mutual Separation Scheme (MSS) and impairments of receivables 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 RM2,200- RM2,400/tonne in 4Q.

• The replanting is progressing well with 9k ha replanted, in line with the new target of 11k ha.

• The group is now in the process of disposing Trurich Resources Sdn Bhd (at 50:50 joint-venture company with Lembaga Tabung Haji) and hopes to complete the deal by 1QFY20.

• Meanwhile, management guided that the group is still looking to dispose 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, especially China and Indonesia.

• Management guided that the MSM Johor plant’s utilization rate is still very low at 25%. The group currently has a total capacity of 2.25mn tonnes, while the domestic demand is only 1.5-1.6mn tonnes.

Impact

• We tweak our FY19-FY21 earnings upward to RM47.7mn - 394.6mn respectively, after factoring in higher-than-expected 3QFY19 results, higher FFB production growth and CPO prices of RM2,400 and RM2,500 for CY20 and CY21, respectively.

Valuation

• We upgraded FGV to BUY from Sell with a higher target price of RM1.59 (previously RM1.03), based on higher 1.2x CY20 P/BV. The increase in P/BV is to reflect its greater earnings visibility now.

Source: TA Research - 29 Nov 2019