This article first appeared in The Edge Financial Daily on April 11, 2019
FGV Holdings Bhd
(April 10, RM1.30)
Upgrade to buy (previously fully valued) with a target price (TP) of RM1.75. We are positive on FGV’s restructuring plan initiated by chairman Datuk Wira Azhar Abdul Hamid and the group’s new management team. We expect the resolution of its labour issues, measures to reduce leakages and new planting programme to result in a significant improvement in cost efficiency, yields and profitability.
The group is one of the biggest plantation land owners in the country yet trades at an enterprise value per hectare (EV/ha) of about US$9,500 (RM38,950) — a 57% discount to the average EV/ha of US$22,000 under our Malaysian coverage — indicating significant improvement potential. The stock trades at 0.9 times book or -1 standard deviation since 2015; and is the lowest in our Malaysian plantation universe. FGV is our new top pick for the sector
Consensus remains neutral to negative on the stock. Our net profit forecast for the financial years of 2019 through 2021 (FY19-21F) is one of the highest in the market as we have factored in the potential of FGV successfully achieving 90% and 92% for FY19-20F of the required labour force for its estates.
Successful execution of operating improvements and cost-optimisation measures will boost earnings and rerate the stock.
Our discounted cash flow based TP stands at RM1.75 assuming a weighted average capital cost of 8.2%.
Lower-than-expected crude palm oil prices are expected to reduce profitability. Government regulation on the hiring of foreign labour is also a key risk to our call. — AllianceDBS Research, April 9.