This article first appeared in The Edge Financial Daily, on February 16, 2016.

Felda Global Ventures Holdings Bhd
(Feb 15, RM1.58)
Reduce with an unchanged target price (TP) of RM1.49: Felda Global Ventures Holdings Bhd (FGV) chief executive officer Datuk Mohd Emir Mavani Abdullah revealed that Malaysia’s plantation sector is facing a labour shortage, which is set to become more severe if the recent hike in the foreign worker levy is enforced. FGV employs 29,000 foreign workers and is facing a shortage of 15% in its labour workforce (or 2,000 to 3,000 workers).

The recent hike in levy for foreign workers in the plantation sector from RM590 to RM1,500 per worker will cost FGV RM43.5 million per year compared with RM17.1 million previously. This will have an immediate negative impact on its net profit.

We estimated that the levy hike could result in an 8% reduction in our financial year 2016 (FY16) earnings forecast. The government has recently announced that it will put the levy hike on hold pending a meeting with stakeholders to be held before Feb 20.

Mohd Emir confirmed that FGV is still in an expansion mode and is looking at an additional 40,000ha of land bank this year. The group is looking at brownfield estates locally or abroad. The key challenge in Indonesia is to find land bank that is fully compliant with the group’s sustainable policies.

He revealed that some of the group’s estates in Sabah and Sarawak were badly hit by El Nino, and the projected production from its estates to decline by 6%. He predicts a very bearish 2016 and his biggest concerns are the current high crude palm oil (CPO) stocks and the downturn in China’s and India’s economies.

FGV forecasts CPO prices to trade at RM2,300 to RM2,400 per tonne in 2016, lower than our estimate of RM2,450 per tonne. The group’s output target appears to be below our projection of 7% growth.

The group’s expectation that it will report a profit in FY15 is in line with our projection of a net profit of RM57 million for the year. We are slightly concerned about the potential El Nino impact on its estates as the indication of a 6% decline in output is below our forecast of 7% growth. Every 1% point cut in our production estimate could reduce our net profit by 3%.

We maintain a “reduce” call and sum-of-parts-based TP of RM1.49 due to concerns about weak earnings. — CIMB Research, Feb 15