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This article first appeared in The Edge Financial Daily on June 2, 2017

Felda Global Ventures Holdings Bhd
(June 1, RM1.77)
Maintain hold with a lower target price of RM1.79:
Felda Global Ventures Holdings Bhd’s (FGV) results were below expectations as the first quarter of financial year 2017 (1QFY17) core net profit of RM28 million accounted for just 19% of our full-year forecast and 16% of the consensus number. This was mainly due to unexpected losses at its sugar division, which was unable to fully pass on the higher raw sugar costs. Our core net profit excludes fair value (FV) of land lease agreement (LLA) charge (1QFY17: RM74.1 million) as well as non-recurring items and adds back the actual payment made for LLA (1QFY17: RM76 million).

FGV reported a net profit of RM2.1 million in 1QFY17, which is lower than our calculation of its core net profit of RM28 million. This is because we have adjusted our core to reflect impairment of receivables of RM29.6 million (relating to non-payment of receivables from one of its distributors for some time) and provision for litigation loss of RM32.8 million (relating to palm oil shipments to Ruchi Soya Industries Ltd) recorded by its plantation segment. However, this is partially offset by the gain from a reversal of provision for bonus of RM36.5 million in 1QFY17.

Plantation earnings (ex-FV change in LLA) jumped significantly to RM97 million in 1QFY17, due to higher average crude palm oil (CPO) selling price of RM3,061 (+31% year-on-year), a 3% improvement in fresh fruit bunch (FFB) output and 5% decline in its average cost of production to RM1,739 per tonne. The sugar division posted its first quarterly loss of RM23 million due to higher raw sugar costs. This, coupled with higher FV changes in LLA, led the FGV group to report a pre-tax loss of RM31 million in 1QFY17.

FGV is targeting to grow its FFB output by 15% in 2017. However, it has only delivered 4% FFB output growth in the first four months of FY17 but remains confident of a strong pickup in output in the second half of 2017. It also plans to reduce its CPO production costs ex-mill by 9% to RM1,450 per tonne. However, 1Q cost of production was higher at RM1,739 per tonne.

Media reports say that the Federal Land Development Authority (Felda) is open to ideas of unwinding the LLA with FGV. We gather that FGV prefers to maintain the LLA as the group believes the estates are an important component of the group’s business. We would be negative should Felda proceed to terminate the LLA with FGV as the income from the potential RM3.8 billion estimated one-off compensation may not be sufficient to offset future income loss from the estates and replanting costs of RM1.7 billion incurred since FGV’s initial public offering. — CIMB Research, June 1
 

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