28/09/2012 (The Star) - We initiate coverage on Felda Global Ventures Holdings Bhd (FGVH) with a market perform recommendation, due to its relatively sober earnings growth (three-year compounded annual growth rate of 4.9%) given our downward crude palm oil (CPO) price projections, and similarly unexciting valuations.

Catalysts required for a re-rating would include the acquisition of a larger stake in Felda Holdings Bhd (FHB), its 49%-owned company; the disposal of its non-core assets and possibly its non-performing assets, which are weighing earnings down; the turnaround of its downstream divisions; and a marked improvement in age profile and yields upon completion of its replanting programme.

We estimate that close to 70% of FGVH's net earnings (including FHB's contribution) is derived from the upstream plantations operations. We have projected gross profit from this division to grow by 21.1% in FY12, followed by a decline of 11.7% in FY13 and a 6.3% increase in FY14.

The growth or declines in our forecasts are driven mainly by our CPO price assumptions of RM3,100 per tonne for FY12 (up from RM2,760/tonne achieved in FY11), RM2,900 per tonne for FY13 and RM3,000 per tonne for FY14. We highlight that the movement of CPO prices have a significant impact on earnings. Based on our analysis, every RM100 per tonne change in CPO price would change our earnings by 4-6% per annum.

The other main factor affecting our earnings projections for the plantation division is fresh fruit bunches (FFB) growth. Although there will be some new areas coming into maturity over the next few years from FGVH's previous replanting activities, the continued aggressive replanting schedule will mean that mature hectarage will actually decline over the next few years.

Workers at the cooking oil factory of Felda Global Ventures Holdings Bhd’s fully-owned subsidiary Delima Oil Products Sdn Bhd in Pasir Gudang, Johor. RHB Research expects 70% of FGVH’s net earnings to come from downstream activities

FFB production growth will therefore come from yield improvements, which will be driven by FGVH's now more hands-on fertilisation and best practice management techniques. We have projected FGVH's FFB yields to fall to 19 tonnes per ha in FY12, before rising by a tonne per ha in FY13-FY15. This translates to FFB production growth of -4.5% per annum to +4.4% per annum for FY12-FY14.

According to the management, every tonne per ha improvement in FFB yield adds RM70mil in profit (7-8%) to its bottomline.

FGVH has set a dividend policy of at least 50% of its net profits every year. Based on our earnings projections, this would translate to a net dividends per share of 13 sen for FY12, 14 sen for FY13 and 15 sen for FY14, implying net yields of 2.5-3.5% per annum.

We value FGVH using a sum-of-parts valuation. This comprises a target price-to-earnings ratio (PER) of 16 times calendar year 2013 for the upstream plantation division and for its associate and JV companies; a target PER of 12 times calendar year 2013 for the manufacturing downstream operations; market price to value its 51% stake in MSM Holdings; and including FGVH's net cash or debts level at the end of the second quarter. We have also assigned a 10% holding company discount to FGVH, given its minority shareholding FHB. Based on these valuations, we arrive at a fair value of RM5 per share.