FELDA GLOBAL VENTURES HOLDINGS BHD

Target price: RM1.50

FELDA Global Ventures Holdings Bhd (FGV) managed to turn its first half financial year 2017 (H1FY17) around to core profitability, though it was still below expectations as its second quarter posted a core loss.

This was caused by the weak sugar division performance, where costs remained overwhelming despite selling price hikes since March 2017.

Meanwhile, the plantations segment was uplifted mainly by stronger crude palm oil (CPO) prices, but H1FY17 volumes remained soft as labour shortages hurt yields.

The group is optimistic of seeing a stronger volume recovery during the second half of the year, but execution risks and sugar arm profitability remain the detracting factors.

FGV announced a Q2FY17 headline profit of RM25.9mil, down 65% year-on-year (y-o-y) and up 100% quarter-on-quarter.

However, stripping out net land lease agreement charges and impairments reveals a core loss of RM58.3mil, swinging from a core profit of RM24.7mil in Q2FY16.

This brings H1FY17 core profit to RM9.3mil, below expectations despite turning around from the RM50.9mil core loss in H1FY16.

The group is aiming for FY17 fresh fruit bunches (FFB) output of 4.3 million tonnes, or 10% higher y-o-y.

This implies a strong 19% rebound in H2FY17 production, with the group’s confidence being fuelled by the progress made on its hiring of foreign labour.

There are ongoing efforts to trim administrative expenses by 5% in H1FY17, and the group will be eyeing the divestment of some non-core and non-performing assets. Also, of the 14,000 ha of older planted areas targeted for replanting this year, 10,000 ha had been cleared and 1,500 ha replanted in H1FY17.

“We cut FY17, FY18, and FY19 forecast earnings by 42%, 15%, and 11%, mainly on reduced margins for its Sugar operations.

“A nearer-term recovery for this unit will be challenging without further hikes in sugar selling prices,” said AllianceDBS Research.