KUALA LUMPUR (Dec 12): RHB Investment Bank Bhd (RHB IB) has maintained its "trading buy" call on FGV Holdings Bhd at RM1.42 with a higher target price (TP) of RM1.65 (from RM1.55), and said it anticipated earnings to continue improving on the back of higher crude palm oil (CPO) prices and lower unit costs.

In a note today, the research house said it maintains its growth projection for financial year 2019 (FY19) at 9.6% year-on-year (y-o-y) and its FY20-21 growth forecast is estimated at 3-5%.

It said this was because FGV targeted FY19 fresh fruit bunch (FFB) growth of 10-15%. In October 2019, year-to-date FFB growth was at 11.3% y-o-y.

RHB IB said FGV noted that the dry weather in the third quarter of 2019 (3Q19) could affect FFB output in 2020, and is projecting FFB output to grow 2-4% y-o-y in FY20.

Furthermore, the research house said FGV has started to do some forward sales and has sold forward about 30,000 tonnes of CPO for 1Q20.

"It is not being aggressive in forward sales, given that only 30% of crop is from its own estates.

"We highlight that once FGV achieves a CPO price of >RM2,500 per tonne, it will start having to pay 15% of its Ebit to Felda Holdings, on top of the RM250 million flat land lease agreement (LLA) fee," it said.

RHB IB added that this will increase costs by an additional RM300-RM350 per tonne, depending on the price achieved.

As such, the research house said FGV may not benefit as much from the upside in the price of CPO being higher than RM2,500 per tonne.

Moreover, it said the group continues to target CPO cost to fall below RM1,400 per tonne from the impact of cost-saving initiatives and lower fertiliser costs in FY20.

It also said fertiliser prices for 2020 are likely to come in lower by 5-10% y-o-y.

In addition, FGV is rolling out best practices across to all its 68 mills in Malaysia by end-2020. One of these practices includes less outsourcing to external contractors, which will reduce costs by 8-10%.

"FGV's non-core disposals of Trutich and the majority stake in MSM's new Johor plant, which is only running at a 20% utilisation rate, may only likely to be concluded in 1Q20.

"In 9M19, it disposed of two non-core assets worth RM129 million (of RM350 million target), which resulted in cost savings of RM130 million (of RM150 million target).

"Further disposals of assets worth RM80 million [are] also in the works, while the cost savings target should be easily met in FY19," it said.

The research house believed momentum driving FGV's share price performance will continue, while CPO prices remain elevated.

At 10.02am, FGV shares added 0.7% or 1 sen to RM1.43, valuing it at RM5.22 billion.