Bursa Malaysia (KLSE) Stock Investment Portal

FGV Holdings (FGV MK)
Misleading Headline Numbers, Disappointing Earnings;
D/G To SELL
Sell (from Neutral)
Target Price (Return): MYR1.35 (-9.4%)
Price: MYR1.49
Market Cap: USD1,308m
Avg Daily Turnover (MYR/USD) 1.45m/0.35m
Analysts
Hoe Lee Leng
+603 9280 8860
hoe.lee.leng@rhbgroup.com
Sean Chew
+603 92808801
sean.chew@rhbgroup.com
Share Performance (%)
YTD 1m 3m 6m 12m
Absolute 16.4 12.9 11.2 12.0 21.1
Relative 18.0 5.8 10.8 10.5 16.1
52-wk Price low/high (MYR) 1.01 – 1.57
Source: Bloomberg
 Downgrade to SELL, from Neutral, with MYR1.35 TP from MYR1.30, 9.4%
downside. FGV’s core profit for 1H21 was below expectations, as headline
numbers included an amount of MYR231m accounting adjustment for changes
made to its land lease agreement (LLA) assumptions. Although we expect the
sugar division to improve in 2H21, the plantation division would still be held
back by weak FFB output and forward sales done at lower prices.
 FGV recorded a core net profit of MYR47m in 2Q21, bringing 1H21 core net
profit to MYR57.8m, making up just 28% of ours and 20% of consensus’ FY21
projections. The main discrepancy came lower-than-expected FFB
performance of -4.7% YoY in 1H21, resulting in higher unit costs. The sugar
division also disappointed, on higher costs, making up 29% of consensus
projections in 1H21. FGV recorded a positive accounting adjustment of
MYR231m for its LLA long term assumptions in 1H21, which we have stripped
out from our core profit calculation.
 FFB output fell 4.7% in 1H21. FGV has lowered its FFB growth target from
+2% to +4% to -3% to -4% for FY21, as it expects the impact of MCO 3.0 and
labour shortage to have an impact on productivity. Current labour shortage
stands at 26% (up from 17% at end-2020). In YTD-July, the FFB growth
moderated further to -7.9% YoY. We cut our FFB growth projection to -5.3%
(from -2.7%) for FY21, but leave our FY22-23F assumption to 3 to 4% growth.
We have also cut our external FFB purchase assumptions accordingly.
 Unit costs rose 7% YoY in 1H21, due to weaker output and higher fertilisation
activities. FGV has applied 45% of its fertiliser requirements in 1H21 (from 35%
in 1H20), Going forward, FGV targets to reduce unit costs (excluding LLA) back
to MYR1,600/tonne in FY21 (from MYR1,619/tonne in FY20). We think this
may be difficult in view of the still weak output, while fertilisation activities will
have to be ramped up in 2H21. We have raised our cost assumptions in line
with our lower FFB outlook.
 Forward sales. FGV’s 1H21 average CPO price was lower than the market at
MYR3,268/tonne, mainly due to forward sales, where 60% of 2Q21’s output
was sold at MR3,200-3,500/tonne. For 2H21, it has sold forward 30% of its own
production.
 The sugar division remained in the black for the third quarter in a row,
albeit with lower QoQ PBT contributions (-55%), due to higher raw sugar prices
(+7% QoQ and +23% YoY). Going forward, this division should see better
earnings, given the higher ASP for export and volumes combined with its
locked-in imported raw sugar requirements at 15-20% below current prices.
 Downgrade to SELL (from Neutral). All in, we cut earnings by 4-14% for
FY21-23. We believe FGV is still at risk of being privatised, given the low public
spread of 13.47%, which will be an overhang on share price. Our SOP-based
TP is raised slightly to MYR1.35 (from MYR1.30), after taking into account
MSM’s latest share price.
Source: Company data, RHB
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Felda Global Ventures (FGV MK)
Price Close
Relative to FTSE Bursa Malaysia KLCI Index (RHS)
Forecasts and Valuation Dec-19 Dec-20 Dec-21F Dec-22F Dec-23F
Total turnover (MYRm) 13,259 14,076 14,048 14,010 14,164
Recurring net profit (MYRm) (158) 103 178 164 164
Recurring net profit growth (%) 151.3 - 72.7 (7.9) 0.2
Recurring P/E (x) na 52.67 30.50 33.12 33.07
P/B (x) 1.3 1.3 1.3 1.2 1.2
P/CF (x) 1.71 1.63 2.82 2.87 2.85
Dividend Yield (%) 1.3 2.0 2.7 2.0 2.0
EV/EBITDA (x) 12.23 6.74 6.66 6.74 6.56
Return on average equity (%) (7.7) 4.5 4.2 3.8 3.8
Net debt to equity (%) Interest cover (x) 53.9 0.23 42.0 3.73 38.4 3.94 34.1 3.74 30.0 3.80
Overall ESG Score: 2.6 (out of 4)
E: Good
FGV adopts a zero-waste management policy and continues to
manage its waste more efficiently through usage of biomass
residue of empty fruit bunches as solid fuel and converting other
by-products into animal feed. In 2019, FGV started to implement
a model estate and mill project to incorporate best practices
across its entire workflow.
S: Moderate
Labour concerns, which have been highlighted recently, are
currently being investigated. Nevertheless, FGV has made
commitments to adhere to the International Labour Organisation’