FGV’s aggressive replanting bears fruit
Planter expected to slash percentage of old trees to 33% this year
HAVING a high percentage of old oil palm trees has long been a challenge for diversified planter Felda Global Ventures Holdings Bhd (FGV).
When FGV was listed in 2012, almost 50% of its palm trees were 21 years old and above – an alarming figure which analysts often highlight to be a big drag on the yield performance of the group’s estates.
However, fast forward to 2018, this long-standing issue is about to change for the better.
Thanks to the aggressive replanting between 13,000 ha and 15,000 ha annually by the group in the past six years, the rejuvenation process of FGV’s old age palm trees is starting to bear fruit.
FGV is expected to slash the percentage of old trees (21 years and above) to 33% this year and is set to reduce it further to about 25% by 2020.
More importantly, the percentage of young and prime age trees will increase to about 47% this year from 30% in 2012.
By 2020, it is expected to rise to 54%. The average tree age in FGV’s estates will also come down to 14 years in 2018 from 17.5 years back in 2012. It will moderate further to 12.8 years in 2020 and down to 12 years by 2022.
Based on a recent company visit, RHB Research is turning more positive on FGV’s fundamentals.
The brokerage is among the first to upgrade FGV to a “buy” this year with a target price of RM2.30 per share.
The supporting factors include the rejuvenation of palm age profile that has resulted in moderating costs, impact from its cost-saving initiatives, recovering waste via the sale of palm kernel shells and sludge, the RSPO certification of its palm oil mills enables FGV with certified sustainable palm oil and certified palm kernel oil premiums.
In addition, FGV is expected to undertake more asset disposals ahead as well as potential mergers and acquisitions (M&As) for its upstream land bank, says the research unit.
Turnaround story
RHB Research in its latest report says: “We believe FGV’s earnings are set to turn around more solidly from financial year ending Dec 31, 2018 onwards.
“Investor sentiment on the stock may change once FGV shows its improved age profile from land bank rejuvenation, which would lead to improved earnings; as well as starts to pull through with its promises of non-core asset disposals and cost-saving initiatives.
“We believe these benefits outweigh the risks, as the market is still unconvinced of FGV’s turnaround story.”
Hence, RHB Research is raising its FGV earnings estimates by 6% to 9% for FY20172019, to take into account the impact of the sale of palm kernel shells and other waste products, as well as to impute slightly higher losses at its downstream division.
“We note that our forecasts currently assume a 55% year-on-year (y-o-y) growth in earnings in FY2018, followed by a 22% y-o-y growth in FY2019.
“Our FY2017-2019 earnings are currently 12%-20% above that of the consensus,” it adds.
At the same time, RHB has lifted FGV’s target price to RM2.30 from RM1.85 previously.
“We have imputed a lower 50% discount (from 60%) to its peers for its enterprise value (EV) per ha valuation target for the plantations division, but keep our 15 times 2018 forecast price earnings for the other divisions and our RM3.40 target price for FGV’s subsidiary MSM Malaysia Holdings Bhd.
“Our EV per ha target is now at US$6,500 per ha. We believe sentiment toward the stock would change once FGV shows its improved age profile and cost-saving initiatives, leading to improved earnings from FY2018 onwards.”
Estates’ yield
With the improvement in age profile, RHB Research points out that FFB yields should start improving.
In FY2016, FGV recorded a FFB yield of 14.5 tonnes per ha and estimated to have improved to 15.4 tonnes per ha in FY2017.
Subsequently, the research unit expects FFB yields to continue to gradually improve to almost hit 20 tonnes per ha by FY2020.
“This would help bring FGV to be almost on par with its peers which have trees of similar age profiles,” it adds .
The group targets to continue replanting 14,000ha to 15,000 ha per year in FY20182019.
On a net basis given its consistent replanting, FGV expects to see a net increase in matured hectarage of about 1,000 ha per year over the next few years.
“As for new planting, FGV intends to plant up its landbank in Indonesia over the next few years.
Of its 17,000ha of landbank in Indonesia, the company has planted up 8,000 ha to date – of which 3,000 ha was planted in FY2017.
In FY2018, it intends to plant up another 5,000ha while the remaining 4,000 ha is targeted to be planted up in FY2019-2020.
Meanwhile, FGV’s costs should start to moderate with a better age profile in line with the improved productivity.
The group should see the full-year impact of having hired an additional 7,000 to 8,000 workers to address its labour shortage problem last year.
Besides this, it should also start to see cost savings from the full-year impact of the closure of four palm oil mills in the second half 2017 – which would result in higher utilisation rates of its other mills, as well as the voluntary separation scheme (VSS) for senior managers and 15% cut in staff allowances implemented in the fourth quarter of 2017.
All in, the FGV management is targeting to reduce unit costs by 7%-8% in FY2018 to RM1,500 per tonne from RM1,620 per tonne in FY2017.
Another interesting development is profit margins gained from the sale of palm kernel shells and other waste products could range from 70% to 75%.
“Assuming an increment of RM40mil from the sale of palm kernel shells, this would generate an additional RM25mil-RM30mil in profit for FGV in FY2018.
“In terms of impact, this would mean an additional 10%-12% in its earnings,” adds RHB Research. In FY2017, the company’s shell recovery rate was at 1% of FFB processed. It aims to increase this to 4% by 2022.
“If this is achieved, FGV’s profits would benefit significantly. We have not imputed the earnings potential from PK shells as yet, to be conservative.”
To date, eight out of FGV’s 68 mills have received RSPO recertification. The group is hoping to receive another eight mills by first quarter of this year.
By end-2018, it is targeting to have an additional 20 mills audited – although certification may not come until later.
“This is positive as FGV is able to receive a premium of US$5 per tonne for its certified CPO and US$70-US$80 per tonne for its certified palm kernel oil sales,” says RHB Research.