FGV share price drops as lower CPO prices, sugar losses to weigh on results

Earnings are expected to be dragged by its 51% stake in MSM, while weaker CPO prices will translate into lower plantation revenue


FGV Holdings Bhd’s share price dropped to 98.5 sen yesterday, a level last seen in January this year, as lower crude palm oil (CPO) prices and its loss-making sugar arm are expected to weigh on the planter’s second-quarter of 2019 (2Q19).

Earnings for the Malaysian planter are expected to be dragged by its 51% stake in sugar producer MSM Malaysia Holdings Bhd, while weaker CPO prices will translate into lower plantation revenue for the group.

MIDF Amanah Investment Bank Bhd analyst Khoo Zhen Ye said the sugar business and CPO prices will impact FGV’s 2Q19 performance.

“Weaker CPO prices do lower input costs for the downstream business, but it will not be sufficient to compensate for the overall decline,” he told The Malaysian Reserve.

“The company’s fundamentals remain intact due to its positive fresh fruit bunches (FFB) yield, improved production costs and reduced overhead expenses. These factors will partially compensate for weaker CPO prices,” Khoo said.

Its share price dropped 1.5% yesterday as investors are spooked by the expected lower quarterly results and the dismal market sentiment. A weak quarter showings will likely see the company’s shares falling further. The company is expected to announce its result today.

For 1Q19, FGV slipped to a net loss of RM3.37 million against the RM1.13 million profit managed in the corresponding quarter last year, while turnover fell 8.9% year-on-year to RM3.28 billion.

The losses were contributed by the sugar and logistics businesses.

The company’s plantation division, meanwhile, registered improved profitability in the quarter on higher downstream contributions and FFB production, but revenue came in lower due to weaker CPO prices.

FGV noted that CPO prices, which have a major impact on the group’s fiscal performance, are to remain under pressure in 2019 due to oversupply and the presence of oilseeds (soybean and sunflower) in the market.

But it said efforts to improve on operational efficiency have borne fruit as exemplified by the increase in FFB production and lower CPO production cost achieved in 1Q19.

The planter posted RM23.23 million in net loss in 2Q18. Improved operational efficiency may help the company lower its losses for 2Q19.

Nonetheless, FGV is expected to remain in the red in 2Q19, owing to the losses incurred by MSM.

MSM is Malaysia’s leading refined sugar producer, controlling close to 60% of the domestic sugar market and has been struggling with losses in recent years as oversupply conditions, lower selling prices and higher refining costs weighed on the company’s earnings.

For its 2Q19, the company registered a net loss of RM67.33 million on the lower average selling prices and higher refining and finance costs recognised for the quarter.

FGV group CEO Datuk Haris Fadzilah Hassan (picture) said FGV is open to all options to strengthen its sugar business.

This includes a stake sale, but only if FGV remains a major shareholder in MSM, as the company does not want to relinquish its decision-making authority, he told reporters late last month.

FGV selling a portion of its shareholding in MSM is perceived as positive for both companies as it allows the former to reduce its exposure to the loss-making company while leveraging on the expertise of potential joint-venture partner to lower the latter’s refining costs.

The planter also intends to divest its 100% stake in the loss-making China-based subsidiary, FGV China Oils Ltd, as part of ongoing rationalisation efforts to exit non-performing businesses.

This is expected to be completed between end-2019 and 1Q20, and will thus not be recognised on the company’s books in 2Q19. No other gains on disposals from earlier exercises are expected for 2Q results due to be announced today.

Earlier in June this year, FGV shareholders voted against three resolutions during the company’s AGM which relate to the remuneration to be paid to the company’s directors.

Federal Land Development Authority (Felda), which effectively owns a 33.7% stake in the company, as well as Koperasi Permodalan Felda Malaysia Bhd and the Armed Forces Fund Board, were reportedly among the dissenting shareholders.

A total directors’ payout of RM5.74 million was announced for the fiscal year ended Dec 31, 2018, against the RM1.08 billion in net losses raked up by the financially troubled Malaysian planter that year.

The remuneration package was perceived as disproportionate to FGV’s fiscal performance.