FGV’s turnaround plans may lead to higher costs and potential impairments

Turnaround initiatives may lead to higher costs in the short term

PETALING JAYA: Plantation giant FGV Holdings Bhd’s turnaround plans may lead to higher costs in the short term and potential impairments, according to CIMB Research.

However, over the long run, the research house expects the turnaround initiatives to deliver stronger returns to the group’s shareholders, if the plans are executed successfully.

In the event of a possible failure to turn around as anticipated, CIMB Research warned that FGV is at risk of becoming even less competitive against its peers.

This may force the plantation group to eventually seek capital from the shareholders if its cashflows continued to deteriorate, said the research firm.

“We are positive on efforts to turn around its operations but this is offset by concerns that the recovery may take longer than anticipated and investors may need to ride through short-term volatility in terms of news flow from the potential shake-up in management and additional expenses required to undertake the turnaround.

“As such, we would prefer to look for signs of a turnaround before turning more positive on FGV,” said CIMB Research in a note, maintaining its “hold” call on FGV with a target price of RM1.67.

FGV will be undertaking eight turnaround initiatives, which include the formation of a special board committee and further enhancement in plantation operations.

The turnaround initiatives are broadly aimed at improving its operational performance and unlocking the value of its non-core assets.

TA Securities Research said it was “impressed by the group’s immediate turnaround plan”, although it expects FGV to face various obstacles in achieving the turnaround target.

“FGV’s fresh fruit bunch (FFB) production target for the financial years of 2018-2019 (FY18-FY19) are estimated at 4.65 million tonnes and 5.6 million tonnes, respectively.

“However, FFB production for the first seven months of FY18 increased by merely 1.9%. Thus, we believe that the management’s growth targets are probably a bit too optimistic.

“In our forecast, we are more conservative and expect the FFB production to be lower than management’s estimates at 4.4 million tonnes for FY18 and 4.9 million tonnes for FY19,” said the research firm.

TA Securities pointed out that the management has no cash-call plan at this juncture, and FGV will need to refinance its debts.

As at June 30, 2018, the group’s short-term and long-term borrowings amounted to RM3.1bil and RM1.1bil, respectively, while its cash balance stood at RM1.6bil.

The research house also said that FGV is now eyeing for potential merger and acquisition opportunities, although no further details were disclosed by the group.

“No change to our earnings forecast. However, the target price for FGV is revised downward to RM1.50 from RM1.68.

“We do not see any re-rating catalysts in the near term that could incentivise a rally. Maintain ‘sell’,” stated TA Securities.

At the close of trading yesterday, the counter was down three sen, or 1.95%, to RM1.51 with about 4.6 million shares changed hands.