This article first appeared in The Edge Financial Daily on June 25, 2019
FGV Holdings Bhd
(June 24, RM1.15)
Maintain hold with an unchanged target price of RM1.18: In his second letter to shareholders filed with Bursa Malaysia, FGV Holdings Bhd chairman Datuk Wira Azhar revealed: i) it is working on a strategic plan to allow FGV to realise its full potential through generating more income from its leased estates or creating more value from its products; ii) it plans to provide more details on its strategic plans by the end of this year; iii) it is also looking to potentially make the strategic shift towards becoming a major downstream player.
On its operational performance, the chairman was disappointed that FGV did not post a profit in the first quarter of 2019 (1Q19), due mainly to lower crude palm oil price. However, he said FGV is on track to meet its fresh fruit bunch (FFB) output target of 4.79 million tonnes for 2019 (+14% year-on-year [y-o-y]) versus achievement in the cumulative five-month period of 2019 (5M19) of 1.69 million tonnes (+8%). It is on track to save RM150 million in procurement costs and has achieved RM60.7 million cost savings in 5M19, or 40.5% of its targeted annual cost savings.
He added that the group is on track to realise the value of its non-core assets and underperforming joint ventures. It has signed one sale and purchase agreement in early June. To recap, the group targets to raise RM350 million proceeds from this exercise.
In the letter, he revealed that the group is confident it will remain on track to be a high performing company even if the Federal Land Development Authority (Felda), its major shareholder, decides to terminate the land lease agreement (LLA) for suitable compensation. This is because the group will still own the refineries and mills, which are processing the FFB from the LLA land.
FGV revealed that it plans to accelerate and scale up its downstream business, should the need arise. Our current stance is that the termination of LLA is negative for FGV as plans to move downstream are likely to take time to bear fruit.
We would be positive if FGV can achieve the aggressive FFB output target of 4.79 million for 2019. This will require the group to post a 17% y-o-y output growth for the June to December period. For 5M19, the group’s FFB output growth achievement of 8% is slightly behind the industry’s performance of 9%.
We remain concerned about the risk that Felda may consider terminating the LLA as our initial estimate suggests the risk reward is negative for FGV. We maintain our “hold” call as market has priced in expectation of better results. — CGSCIMB Research, June 21