FGV Holdings announced yesterday that its IT arm, FGV Prodata System S/B had been served with a sealed Writ of Summons by VDSL Technology S/B (VDSL) for compensation and damages amounting to RM170.7m due to various breaches with regard to the Felda Broadband Initiative Project. In the event FGV’s subsidiary loses the case, the one-off financial impact is 4.6sen/share or a 37% hit to our FY21 earnings forecast. We expect some share price weakness today following this negative newsflow. We introduce new SOP-based TP of RM1.56 after resuming our coverage and also take into our recent CPO price revision. Maintain Neutral.

• Salient details of the legal suit. On 18 May, FGV Prodata was served with a writ of summon claiming for compensation and damages totaling RM170.7m. VDSL is claiming for compensation and damages due to FGV Prodata and the Felda’s alleged breaches on various arrangements agreed upon by the parties with regard to the Felda Broadband Initiative Project. FGV Holdings and its IT subsidiary are currently seeking legal advice to act against the writ of summons and the e-review by the High Court has been set on 11 June.

• Salient details of Felda Broadband Initiative Project. VDSL Network was tasked by FGV Prodata to come up with a blueprint and action plan to provide high speed broadband and services for 317 FELDA settlements throughout the whole country. It was supposed to improve the connectivity for all Felda settlers. Our channel checks show that the project was initiated in 2014 but there were little news about the development after that.

• Worst-case scenario. In the event they lose the court case, the one-off financial impact is 4.6sen/share or a 37% hit to our FY21 earnings forecast. Perhaps, settle out of court would be the more favourable outcome for both parties.

• Expecting stronger performance in the upcoming results release. The 1QFY21 are expected to be released on 27th May. During the quarter, the Group recorded FFB production growth of 4.2% YoY to 742,426mt. Given the sharp increase in CPO prices coupled with only small CPO quantity for forward sales, we expect to see a strong set of results.

Source: PublicInvest Research - 21 May 2021