FGV rallies on better plantation prospects

However, its current land lease agreement and losses from the sugar business remain lingering risks

by MARK RAO/ pic by TMR FILE

FGV Holdings Bhd’s shares have been rallying since October on the improving outlook for crude palm oil (CPO) prices and the turnaround of its plantation division, but its current land lease agreement (LLA) and losses from the sugar business remain lingering risks.

An analyst at Affin Hwang Investment Bank Bhd said FGV’s share price has done well over the past one to two months, partially due to positive sentiment surrounding the plantation sector.

“Higher CPO prices; FGV’s transformation plan starting to bear fruits; disposal of loss-making entities; and an improvement in earnings could potentially help move FGV’s shares further,” the analyst, who preferred to remain anonymous, told The Malaysian Reserve (TMR).

The analyst said investors are looking ahead to 2020 with CPO prices expected to trend higher on top of FGV’s transformation plan, which includes improving operational efficiency and production for the plantation division.

According to Bloomberg data, analysts covering FGV raised the target price (TP) for the stock by 29% in the past three months for a consensus one-year TP of RM1.38 — a potential upside of 4.5% from the company’s last closing price of RM1.32 yesterday.

Shares in FGV are already up 54% since Oct 7 this year, giving the company a market capitalisation of RM4.8 billion.

For its third quarter ended Sept 30 this year (3Q19), the Malaysian planter narrowed its net losses by 69% year-on-year (YoY) to RM262.41 million, owing to the higher yields and lower costs achieved, which saw turnover for the quarter grow by 11% to RM3.55 billion.

The company, however, remained in the red for the quarter, largely driven by impairments amounting to RM304 million, low CPO prices and losses incurred from its majority-owned sugar producer, MSM Malaysia Holdings Bhd.

Over the first nine months of 2019, the company’s net loss came in 63.5% lower YoY at RM317.98 million despite revenue dipping 1.3% YoY to RM10.1 billion.

FGV’s management indicated that negotiations in regard to the sale of its 50%-owned Trurich Sdn Bhd are expected to conclude by 1Q20.

The company recognised an impairment of RM125 million from the shareholder’s advance for the loss-making Trurich in 3Q19. The planter is also in talks with a strategic partner from China to sell 70% of the excess sugar produced by MSM Malaysia’s new refinery in Johor.

These developments, coupled with the company’s improving fundamentals, bode well for FGV going forward.

Rakuten Trade Sdn Bhd VP of research Vincent Lau said the worst is likely over for the company with a new management team and chairman in place, coupled with rising CPO prices.

“The company’s latest results show a narrowing of losses — putting it on the right track for a turnaround,” he told TMR.

“With the current CPO price, FGV is likely to return to profit in the following quarters ahead.” FGV’s LLA with its largest shareholder, Federal Land Development Authority (Felda), as well as labour shortages and further losses from the sugar business, are the downside risks the company is exposed to, according to the Affin Hwang analyst who spoke to TMR.

While shareholders recently agreed to the revised remuneration structure for the group’s directors, which included slashing the chairman’s fees by 50%, the future of FGV’s LLA with Felda is up in the air.

As part of its public listing, FGV entered into an LLA with Felda in November 2011 which saw 351,000ha of Felda’s land leased to FGV for a period of 99 years.

In return, FGV agreed to pay an annual fixed-lease payment of RM248 million, as well as a 15% share of the operating profits from the land under the LLA. However, the substantial fall in CPO prices during that period meant Felda’s profit share from the agreement came in well below its expectations.

There have been reports stating Felda, which holds a 33.7% stake in FGV, could review the current LLA.

The Affin Hwang analyst said the lack of clarity over the agreement could have a negative impact on sentiment surrounding FGV.