Felda Global Ventures Holdings Bhd
(Jan 9, RM2.18)
Upgrade to neutral from sell with a lower target price (TP) of RM2.20 from RM2.80: Though we believe FGV’s outlook will remain bleak unless the company is able to boost earnings via earnings-accretive acquisitions and extract synergy from its previous acquisitions, we believe valuations have fallen to fair levels, given its 39% share price drop over the last 1½ months. We upgrade the stock to “neutral” from “sell”, with a lower TP of RM2.20. We also make earnings adjustments for the impact of the floods and its acquisition of Asian Plantations Ltd (APL).

Year-to-date November 2014, FGV’s fresh fruit bunch (FFB) production was down 3.2% year on year (y-o-y) — lower than our projected 0.7% decline for financial year 2014 ended December (FY14).

Management clarified that up to end-December 2014, the floods on the East Coast had affected 23,730ha (6.7% of its planted estates), and estimated losses for FFB at about 11,000 tonnes.

Assuming December 2014 FFB production is down a conservative 15% month-on-month from November 2014 due to the impact of the floods, FGV could end the year with FFB production down about 5%.  

We are adjusting our forecasts to reflect this projection for FY14. For FY15 to FY16, we leave FFB growth unchanged at 0% to 2% per year.

We expect to see the impact of FGV’s acquisition of APL coming through from the first quarter (1Q) of FY15 once the acquisition is completed.

As mentioned in our earlier reports, we expect the immediate earnings impact of this acquisition to be negative, given that APL is a loss-making entity.

We project the immediate impact to FGV’s bottom line to be a negative 9% to 10% for FY15 to FY16, after taking into account the interest income foregone, given APL’s RM448 million debt.

In the longer term (post FY17), however, the impact should be positive once the trees are older (current average is five years). We have now incorporated the impact of this acquisition into our forecasts from FY15 onwards.

All in, we have cut our earnings forecast for FGV by 5.4% for FY14 and 9% to 10% for FY16 to FY17. As a result, we cut our sum-of-parts (SOP) based TP to RM2.20 from RM2.80, implying 2.3% upside.

We upgrade our recommendation to “neutral” from “sell”. We highlight that every RM100 per tonne change in crude palm oil price could affect its earnings by 4% to 6% per annum. — RHB Research Institute Sdn Bhd, Jan 9

This article first appeared in The Edge Financial Daily, on January 12, 2015.