This article first appeared in The Edge Financial Daily on November 1, 2019

FGV Holdings Bhd
(Oct 31, RM1.10)
Maintain hold with a higher target price (TP) of RM1.05: We recently organised a two-day client visit to FGV Holdings Bhd’s Inas Selatan estate, Penggeli palm oil mill, Delima Oil’s palm refinery, MSM Malaysia Holdings Bhd’s sugar refinery and Felda-Johore Bulkers Sdn Bhd bulking terminal in Johor to view and appreciate the conditions and development of FGV’s operations.

Part of the group’s transformation plan to improve productivity is through the introduction of block harvesting at the estates, and this initiative has helped to improve Felda Inas Selatan’s production volume. The next step, in our view, is to bring in more mechanisation tools which can help to collect and transport fresh fruit bunches faster to the mills.

FGV’s Penggeli palm oil mill covers about 17 of Felda internal estates and some nearby smallholders’ estates. The Penggeli palm oil mill’s utilisation rate is about 85% to 90% with oil extraction rate of 20.6% in the nine months of financial year 2019 (FY19), which is good in our view.

We understand that MSM’s Johor refinery is currently running at about 18% to 20% of its 1.25 million tonnes production capacity (second quarter of FY19 utilisation rate: 20%-30%). In order to increase its utilisation rate, MSM has diversified into other sugar-based products including liquid sugar and sugar premixes.

We project a wider core net loss of RM123.5 million for FY19, but raise our forecast FY20-21 core earnings per share by 6.8%/7.8% mainly to account for: i) higher operating expenditure; ii) lower earnings contribution from the sugar division in FY19 due to a lower utilisation rate at the Johor refinery; and iii) higher earnings contribution from the sugar division in FY20-21 from the sales of new value-added products and improved operational cost efficiencies. Given our earnings forecast revisions, we raise our TP for FGV to RM1.05 from RM1, based on an unchanged forecast FY20 price-earnings ratio of 32 times. — Affin Hwang Capital, Oct 31