Low price point a buying opportunity for FGV shares?

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FELDA Global Ventures Holdings Bhd (FGV) has been down on its luck lately. Although its share price had rallied 34% from late January, poor quarterly earnings announced last week sparked a sell-off, wiping out some 38% of that gain in just one day.

The counter fell a sharp 13% to close at RM2.56 last Wednesday, a day after the agri-business giant announced its results for its financial year ended Dec 31, 2014 (FY2014). It now stands at just over 56% of its initial public offering (IPO) price of RM4.55.

While shareholders who had bought into its IPO in mid-2012 would not have much to shout about, could the present low price indicate a buying opportunity?

Granted, there have been grumblings from some quarters about the lacklustre performance of FGV (fundamental: 1.55; valuation: 0.6) on the stock market.

While the company has problems and legacy issues to deal with, it also has 450,000ha of plantation land — one of the largest in the world — not including the almost 500,000ha leased from the Federal Land Development Authority.

To be fair, FGV timed its listing right at the apex of the crude palm oil (CPO) price boom in mid-2012. However, CPO took a downward turn and is today trading below RM2,300 per tonne compared with almost RM3,600 per tonne at the time FGV was listed.

This means that the valuation of plantation companies across the board is at quite a big discount at this point in time.

“If you are taking a long-term view, then yes, this would be a good price point to buy into FGV. But you must be prepared to hold the stock for at least three to five years,” says an analyst with a local research house. “That’s how long it would take for its replanting efforts to kick in.”

Since its listing, FGV has been actively replanting its estates to spruce up its old-age profile — about 50% of its palm trees are more than 18 years old. The group’s replanting target is 15,000ha a year and last year, it spent RM327 million on replanting, according to a CIMB Research report.

“If CPO prices head towards an up cycle just as FGV’s new plantings come onstream in a few years, then it would be a star performer,” another analyst notes.

The analyst community has so far forecast CPO to average between RM2,100 and RM2,650 per tonne this year compared with 2014’s average of RM2,400 per tonne. MIDF Research, which has one of the higher projections, expects to adjust its RM2,650 forecast downwards.

Beyond this year, analysts expect CPO to perk up and rise above RM2,600 per tonne by 2017.

But even if FGV’s young palm trees begin producing as CPO prices increase, an analyst notes that this would still be in a small portion of its landbank.

Based on FGV’s 15,000ha replanting target since its listing, this portion would make up barely 4% of the total landbank under its management.

“FGV’s upstream performance hinges on CPO prices, so it will tend to see a lot of volatility in earnings. The present CPO market is not a good one but in an up market, FGV could be a darling,” says an analyst with a local bank-backed research house.

He adds, however, that investors should also look at FGV’s cost of production, which could eat into its bottom line even if CPO prices are strong.

Another swing factor for the group when taking a long-term view is the profitability of its downstream division.

In FY2014, this segment posted a loss before tax of RM125.2 million — more than double its loss of RM52.5 million in FY2013 — dragging down overall earnings.

The group attributed the decline to lower margins from its soy and canola crushing unit in Canada as well as negative margins from its refining operations in Malaysia.

“It is difficult to take a long-term stance on FGV because its downstream operations are still variable in terms of future performance,” says the analyst with the bank-backed research house. “Other crushing players in America seem to be getting good prices, but not FGV. To be fair, it could be a one-off stroke of bad luck because of cold weather last year, which crimped production. But this is not something we can be sure of in the long term and FGV has to prove itself first.”

FGV’s upstream segment also took a beating in FY2014, slipping 39% to RM704.6 million from RM1.16 billion the year before.

Overall, the group’s results came in below expectations with its fourth quarter net profit falling 96% year on year to RM20.2 million. This brought full-year net profit to RM306.4 million, down 68.8% y-o-y.

FGV’s bottom line was squeezed even though it saw revenue grow 16% y-o-y to RM4.3 billion in 4QFY2014, bringing its full-year revenue to RM16.4 billion, up 30.7% from the year before.

As a result, many analysts have downgraded the stock post the results (see table).

In fact, The Edge Research’s scores for the company have declined from a month ago. Where its fundamental score was 2.1, it is now 1.55 while its valuation score has fallen to 0.6 from 2.4.

The valuation score reflects the decline in both FGV’s share price and earnings to date. Its net asset value per share has also dropped to 1.74 sen from 1.8 sen the year before.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.