This article first appeared in The Edge Financial Daily, on March 4, 2016.

Felda Global Ventures Holdings Bhd
(March 3, RM1.52 )
Reiterate sell with a higher target price (TP) of RM1.33: Felda Global Ventures Holdings Bhd (FGV) reported its first core loss since listing at RM172 million in 2015, as crude palm oil (CPO) average selling price (ASP) achieved in financial year 2015 (FY15) (RM2,210/tonne) was below our estimated all-in cost of production of RM2,237/tonne. FY15 overall plantation losses were mitigated by stable sugar earnings. 2016 outlook remains bleak amid rising wage costs. 

Valuation is stretched at 40 times/22 times FY16/FY17 price-earnings ratios (PER). Sell with a revised TP of RM1.33 as we switch our valuation methodology, now based on 1 times historical price net tangible asset (PNTA) (previously RM1.30 on 16 times FY16 PER). 

A still weak fourth quarter FY15 (4QFY15) core profit after tax and minority interests (Patmi) of RM16 million (3QFY15 loss of RM158 million; 4QFY14 loss of RM190 million) resulted in an overall FY15 core loss of RM172 million (FY14 core Patmi of RM96 million). 

This was below our consensus estimate of RM138 million and consensus estimate of RM107 million in core Patmi. The results underperformed on trading losses, high plantation costs, low CPO ASP (-8% year-on-year [y-o-y]), and a 6% decline in fresh fruit bunch output growth. 

Its sugar division was the only sweet spot with a profit before tax of RM400 million (+7% y-o-y) on lower raw sugar costs. Headline Patmi included the reversal of impairment on the disposal of TRT-Etgo (RM133 million), disposal gain (RM13 million) and land lease liability adjustment gains (RM136 million).

We estimate FGV’s all-in cost of production was at RM2,237/tonne in FY15 (+8% y-o-y), one of the highest among industry peers. With the new minimum wage effective July 1 (+11%-15%) and potentially higher foreign worker levy (+154% y-o-y), there may be further cost pressures in FY16 and FY17. As for sugar, we expect its contribution to be relatively flattish.

Following the results, we cut our FY16 and FY17 earnings per share (EPS) by 52%/36% and introduce our FY18 forecast. 

Despite our expectations of FY16 EPS returning to the black, valuations remain pricey. Amid uncertainties on a revised PT Eagle High (not rated) deal and with no catalyst in sight, we reiterate our “sell” call on FGV. Net dividend per share for FY15 was slashed by 60% y-o-y to four sen. — Maybank IB Research, March 1