Expect a weak start to 2016

FGV’s 1Q16 results will likely disappoint at near breakeven level. And, there is a small probability that it could slip into the red if its plantation cost of production turns out to be higher than expected or sugar contribution is weaker than expected following recent increase in raw material cost. We are keeping our earnings forecasts for now. Maintain SELL with an unchanged TP of MYR1.33 on 1x trailing PNTA.

Sharp decline in 1Q16 FFB output

The below-average rainfall following 2015’s El Nino has led to a sharp 16% YoY decline in FGV’s 1Q16 FFB output to 781,216t (-33% QoQ) – see Fig 2 overleaf. This met just 17% of our full-year forecast, a slow start to 2016. In our 2016 forecast, we had imputed flattish FFB output growth.

1Q16 CPO ASP insufficient to offset weak output

While CPO price had a good run up towards end-1Q, the 1Q16 MPOB’s CPO price which averaged MYR2,415/t (+7% YoY, +12% QoQ) was insufficient to offset the decline in FGV’s FFB output, we estimate. Hence, we expect its plantation division to turn in losses due to its high production cost base. This could however be mitigated by stable earnings contribution from its 51%-owned sugar refiner under MSM (MSM MK, HOLD) where we expect MYR89m in PBT contribution in 1Q16.

Results likely to disappoint

All considered, we expect FGV to report near breakeven level for 1Q16 results. And, there is potential for FGV to turn in a small loss depending on the manuring activities done in 1Q or earnings shortfall from its sugar division on rising sugar cost pressures. Against our (MYR141m) and consensus (MYR233m) full-year net profit estimates, FGV’s 1Q16 core results are likely to disappoint. Its recent voluntary RSPO suspension (effective 3 May 2016) may add to some earnings pressure in 2H16.

Source: Maybank Research - 5 May 2016