CGS-CIMB: Sale of FGV China Oils is a positive move for FGV

  • Business
  • Tuesday, 16 Jul 2019

CIMB Research and Kenanga Research have said that the depressed crude palm oil (CPO) prices will continue to force the world

PETALING JAYA: The sale of FGV Holdings Bhd’s loss-making FGV China Oils Ltd (FGVCO) to China-based Grand Industrial Holding Co Ltd for RM100mil will allow the group to stop accounting for losses in its loss-making entity.

CGS-CIMB Research said yesterday that the divestment was a positive move for FGV.

“Following the disposal, FGV would no longer need to consolidate the losses from FGVCO of around RM25mil to RM27mil over the past two years, which is positive.

“However, this is offset by the fact that the group would not be able to recoup the losses from its investment in the future following the sale.”

Nevertheless, the research house said it was “neutral on the newsflow”.

“We maintain our ‘hold’ call and sum-of-parts target price of RM1.18 (which assumes FGVCO to be worth RM91mil close to the selling price). The key upside/downside risks are higher/lower crude palm oil (CPO) prices.”

To recap, the group had invested RM193mil in FGVCO on March 31, 2015. However, FGVCO has been posting losses over the past three years.

Meanwhile, MIDF Research in a recent report also said it was “positive” on the deal, adding that the disposal was in line with FGV’s transformation plan to streamline its performing core business portfolio while rationalising its non-performing assets.

“Note that FGVCO has always been in a loss-making position ever since it was acquired in 2015 as a result of the intense competition from major regional suppliers in China. Thus, we are of the view that the disposal would help to contribute positively towards FGV’s profitability, moving forward, as well as bring the group closer to its targeted asset-monetisation plan.

“We are also guided that FGV is expected to dispose assets worth about RM100mil to RM150mil in 2019.”

The research house noted that FGVCO had incurred a loss of approximately RM15mil in 2018.

“Taking this as a benchmark, we expect FGV’s bottom line to improve instantly upon the completion of the disposal. We also understand that the loss on disposal incurred is very minimal. Thus, we would most likely observe a slight improvement in profit margin for the group.”

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