CGS-CIMB Research retains Hold for FGV with higher TP of RM1.34

FGV reported a strong core net profit of RM226mil in 3Q20, thanks to stronger FFB output, higher CPO price and milling profit.

KUALA LUMPUR: CGS-CIMB Research retains Hold for FGV Holdings Bhd with a higher target price of RM1.34 from its earlier RM1.21 on higher earnings outlook though there were some concerns about the potential corporate exercise with FELDA.

The research house said on Wednesday it raised its net profit to reflect higher crude palm oil (CPO) price assumptions, higher sugar contributions and lower fresh fruit bunches (FFB) output assumption.

“While we are positive on the turnaround in earnings, we remain concerned over the potential plans by FELDA to terminate the land lease agreement (LLA) and buy back the palm oil mills, which will dampen future earnings prospects of FGV, ” it said in a research note.

“As such, we are keeping to our Hold rating. However, we raise our sum-of-parts based TP to RM1.34 (to reflect RM9,500 per hectare for the lease estates vs RM8,000 per ha in view of improving earnings).

To recap, FGV reported a strong core net profit of RM226mil in 3Q20, thanks to stronger FFB output, higher CPO price and milling profit.

“The group 3Q20 core net profit is significantly better (vs. 2Q20’s RM28mil core net profit and 3Q19’s RM21mil core net loss) due mainly to higher plantation contribution, lower land lease payment and lower losses from the sugar division.

“This has allowed FGV to turnaround and report a core net profit of RM90mil for 9M20 from core net loss of RM136mil in 1H20.

“We consider the 3Q20 results to be above our full-year projections due to better-than-expected CPO price achievement but in line with consensus, ” it said.

CGS-CIMB Research pointed out that key interesting observations from analyst briefing were that FGV said its 2020F FFB output is likely to fall by 8%-10%, short of its earlier expectation of 6% growth due to the closure of some estates due to the recent spike in Covi-19 cases and flooding in northern parts of Peninsular Malaysia.

On top of this, it expects 4Q20F foreign labour workforce to meet only 90% vs. current 94% of total requirement.

In terms of fertiliser, it applied 68% of its annual fertiliser requirement in 9M20 and plans to complete the rest in 4Q20.

The research house said the group revealed that it has signed two conditional sales and purchase agreements to divest Koa Malaysia and FGV Cambridge Nanosystems for about RM57.2mil in value which could be booked as one-off gains when completed.

The group also revealed that it has not received any termination notice from FELDA on the LLA and indicated that the agreement is not definitive on whether the calculation of profit compensation for the estates should be based on the latest audited figure of earnings when the termination notice is served, or 18 months after the termination notice, or in between.

The group did not disclose much on the potential offer from Tan Sri Syed Mokhtar’s private vehicle to participate in FGV via injection of its plantation assets, except that it is still under discussion.

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FGV , Felda , CGS-CIMB Research , foreign labour


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