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This article first appeared in The Edge Financial Daily on May 31, 2019

KUALA LUMPUR: Improved operational efficiencies under a three-year transformation programme devised by FGV Holdings Bhd’s new management is expected to support the group in facing sustained low levels of crude palm oil (CPO) price for the year, according to analysts.

When announcing its financial results for the first quarter ended March 31, 2019 (1QFY19) on Wednesday, FGV said it had reduced CPO production cost by 20% year-on-year for the quarter, thanks to cost rationalisation and efficiency improvement measures carried out since the new management’s appointment.

AllianceDBS Research equity research analyst Low Jin Wu, in a note yesterday, wrote FGV’s new resolution for labour issues, amid its efforts to scale down non-core non-performing assets while taking more stringent and structured block harvesting measures, have been beneficial for the group.

“The lower CPO production cost is also partly attributable to a postponement of fertiliser application due to ongoing procurement measures,” Low said, adding FGV is expected to save RM80 million annually through a better procurement and more suitable fertilisers.

Hence, FGV’s profitability has been improving through lower operational costs and higher yields, despite persistently weak CPO prices, Low said, adding “we opined that FGV is on track to return to industry norms after a long stretch of underperformance”.

Similarly, MIDF Amanah Investment Bank Bhd analyst Khoo Zhen Ye raised his FY19 forecast core earnings for FGV to RM56.9 million in view of the lower average CPO production cost, a higher fresh fruit bunch (FFB) production growth, and its downstream segment’s improved margin.

“Improvements in [its] operations [will] help to partially offset a challenging CPO price environment,” he told The Edge Financial Daily in a phone interview.

Khoo believes the CPO price would remain under pressure due to elevated stockpiles, a global soybean glut and the escalating US-China trade rift. In addition, he said the second half of the year would typically command a stronger production growth, further raising inventory levels amid subdued demand.

“A sustained weak CPO price would still be a dampening factor to the group’s earnings momentum,” Khoo said.

However, Kenanga Research equity analyst Adrian Kok thinks FGV will remain loss-making in the near term, notwithstanding anticipations of a further fall in the group’s production costs on improved efficiencies, the completion of their fertiliser application, and a pickup in FFB output.

“[There are] no changes to our FY19 and FY20 estimates as we expect losses to widen in the subsequent quarters on lower CPO prices,” he said.

Due to the CPO price decline, FGV posted a net loss of RM3.37 million in 1QFY19, versus a net profit of RM1.13 million in the year-ago quarter. This is its fourth straight loss-making quarter, albeit the lowest loss since 2QFY18. Quarterly revenue dipped to RM3.28 billion from RM3.6 billion in 1QFY18.

As at yesterday, FGV had two buy calls, five holds and five sells, according to Bloomberg.

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