PETALING JAYA: FGV Holding Bhd’s restructuring plan, which took off in January, could very well bear fruit in the first quarter of the year itself.
AllianceDBS Research said FGV is on track to record core profit for the first quarter of 2019 on the back of its cost optimisation efforts.
This could see its crude palm oil (CPO) production cost (ex-mill) dropping to less than RM1,500 per tonne.
FGV’s CPO production cost (ex-mill) has been declining steadily over the last few quarters, at RM1,777 per tonne in third quarter 2018 and RM1,572 per tonne in fourth quarter 2018.
“Based on our estimates, first-quarter 2019 CPO production cost could come in below RM1,500 per tonne. With this, we expect FGV to record a profit for the first quarter.
“However, we believe that first quarter earnings will most likely constitute less than 10% of our full-year forecast. We expect a better second-half performance,” it said in a research note.
FGV made a net loss of RM1.08bil for financial year 2018 (FY18) while its net loss for the fourth quarter ended Dec 31 last year was RM208.8mil.
AllianceDBS has maintained its “buy” call with a target price of RM1.75.
While consensus for the counter remained neutral to negative, the research house said its higher net profit forecast for FY19-FY21 was due to it factoring in FGV achieving 90%-92% of the required workforce for its estates.
It added that operation improvements and cost optimisation would boost FGV’s earnings and potentially re-rate the stock.
FGV has increased productivity incentives for estate workers despite its rationalisation plans and this is expected to motivate workers and improve the collection of fresh fruit bunches (FFB) and overall FFB yields.
The research house also viewed FGV’s potential disposal of 50%-owned Trurich Resources Sdn Bhd as a positive development and the valuation of US$1bil of 100% of Trurich would help reduce FGV’s gearing.
AllianceDBS said FGV should focus on its Malaysian plantation before venturing overseas.
CPO prices are also expected to improve despite the weaker export outlook, high stock levels and the European Union’s efforts to phase out palm oil, which is projected to reduce exports of Malaysia and Indonesia by some 6.5 million tonnes, about 9% of the total palm oil production.
Negative as it may be, AllianceDBS said there would be no immediate impact towards demand as this is only expected to happen in 2030. The losses could also be alleviated by Malaysia’s B10 biodiesel mandate.
“We expect a rise in average CPO prices, based on the pick-up in demand due to dissipating effects of bumper crops from Indonesia in 2018 along with restocking activities from India and China as well as improved demand from Indonesia and Malaysia’s B20 and B10 mandates,” it said.
The research house added that the improving age profile of trees would also be a catalyst for FGV’s earnings and it expects the average age of trees to fall from 16 years currently to 14 years in 2025, following its replanting plans of 13,000ha a year since 2012.
The overall age profile is old or mature, as 40% of trees are at least 20 years old. Not much new planting would be expected as replanting would be a higher priority.
Meanwhile, challenging conditions are expected for FGV’s sugar division in FY19-FY20 due to shrinking profitability from high raw sugar costs and the ceiling price of RM2.85 per kg.
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