CIMB Research maintains Reduce for FGV

Going downstream: The proposed acquisition of Zhong Ling Nutri-Oil is in line with FGVHB

KUALA LUMPUR: CIMB Equities Research is retaining its Reduce recommendation for felda Global Ventures (FGV) due to concerns over its poor earnings. 

It said on Wednesday that possible key de-rating catalysts for the plantation company are poor FY16 results due to declining output and earnings dilution from its past acquisitions. 

“Our target price of RM1.49 is based on sum-of-parts. In 1Q16, the group posted a 16% on-year decline in fresh fruit bunches (FFB) output from its estates, which is significantly poorer than the achievement of the Malaysian palm oil industry (10% on-year decline in FFB output over the same period),” it said.

In the latest development, FGV and the Felda Group withdrew its Roundtable on Sustainable Palm Oil (RSPO) principles & criteria certificates (P&C) of 58 mill complexes located throughout Malaysia effective  May 3, 2016. 

“This exercise does not affect Felda Group's RSPO Supply Chain Certification System (SCCS) certificate of its kernel crushing plants and downstream refineries. It remains an RSPO member and is addressing sustainability issue,” it said.

CIMB Research said Felda remains a member of RSPO and continues its commitment to RSPO-P&C. The group said that it is currently addressing all sustainability issues along the supply chain. This exercise allows a more inclusive certification between commercially managed plantations by FGV and Felda smallholders.  

“This came as a surprise to us and the market. We believe that the decision could be linked partly to the alleged breach of labour conditions at their plantations in the treatment of workers, which had led to the suspension of their Pasoh palm oil mill, which was filed under the RSPO complaint case trackers,” said the research house. 

The research house said a recent report by Chain Reaction Research also alleged that the group’s subsidiaries are in breach of RSPO standards as its subsidiaries cleared 880 ha of high conservation value peat lands.

“This is negative for FGV as the group will no longer be able to sell RSPO-certified sustainable palm oil to its customers. This could result in lower selling prices achieved for its CPO as the group will no longer be able to command a Certified Sustainable Palm Oil (CSPO) premium for its palm products.

“The withdrawal could dent the group’s reputation and image as a sustainable palm oil producer. It could also lead to potential loss of customers who are looking for sustainable palm oil products,” said the research house.

 CIMB Research estimate the CSPO premium value on its palm oil to be around RM30mil to RM40mil. 

“Based on this, the dent to our net profit works out to be approximately 6% for FY16 and 7% for FY17,” it said.