This article first appeared in The Edge Financial Daily on January 16, 2019 - January 22, 2019

FGV Holdings Bhd
(Jan 15, 93 sen)
Maintain hold with an unchanged target price (TP) of 92 sen: In a letter to shareholders filed with Bursa Malaysia yesterday, FGV Holdings Bhd chairman and interim group chief executive officer (CEO) Datuk Wira Azhar Abdul Hamid said the company plans to announce a new group CEO in the next few days, and has identified several non-core businesses and assets with an estimated value of RM350 million to be disposed of, as well as several areas for the development of strategic alliances or partnerships to capitalise on its strengths and plug capacity gaps.

The chairman said FGV’s new management team is now almost fully in place, having appointed a new group chief financial officer, a chief procurement officer, a chief operating officer of plantation operations and a chief human resource officer. The new team will implement a transformation plan to turn around the company.

The transformation plan involves improving operations, including intensifying crop recovery, cost reduction in estates, implementing mechanisation and enhancing agricultural practices; reducing operational leakages and inefficiencies by reviewing group-wide procurement policies and practices, rightsizing

manpower, reviewing capital structure and financing costs; reviewing underperforming joint ventures; selling non-core assets; and developing a performance-oriented culture.

It is targeting fresh fruit bunch (FFB) yields of 16.9 tonnes per hectare for 2018 forecasts (2018F) and 19.43 tonnes per hectare for 2019F. In line with the improved FFB yields target, it projects the average crude palm oil (CPO) production cost (ex-mill) to fall from RM1,666 per tonne in 2018F to RM1,469 per tonne in 2019F.

The group has estimated it could earn a profit before tax of RM1 billion per annum, at an average CPO price of RM2,500 per tonne, and that it could save RM150 million in 2019 from plugging leaks and addressing inefficiencies. We are positive on the aggressive key performance indicators (KPIs) set to turn around its operations and performance. If successfully executed, there could be an upside to our earnings projection.

However, this is offset by our concerns over higher labour costs, potential provisions for its 50% investment in Trurich and rightsizing its manpower, as well as rising competition for its sugar refining business. We maintained our “hold” rating and TP of 92 sen, a 10% discount to sum of parts. We will turn more positive when seeing evidence of the operational turnaround outstripping the aforementioned concerns.

We estimate fourth-quarter core earnings to remain weak, in view of the lower average CPO price in the fourth quarter of 2018 (4Q18) of RM1,902 per tonne versus 3Q18’s RM2,192 per tonne. — CGSCIMB Research, Jan 14