FGV earnings likely to continue improving on robust CPO prices
The Star Online (03/03/2020) - KUALA LUMPUR: FGV Holdings Bhd (FGV) earnings are expected to continue to improve on the back of its strong fourth quarter results, higher crude palm oil prices and as its transformation plans bear fruit, according to brokerage firms.
The company posted net profit of RM75.79mil in the fourth quarter ended Dec 31,2019 (4Q19) compared with a net loss of RM209.16mil a year ago due to improved crude palm oil margins and reduced operating costs.
FGV has managed to reduce its oil palm average age to 13.2 years in 2019 from 16.3 years in 2012, which should benefit the group in terms of increasing the prime age hectarage and better fresh fruit bunch (FFB) yield, according to Affin Hwang Capital in a note.
However, the research house said it has tweaked its forecast 2020-2021 estimated core earnings pr share lower by 3% to 5%, mainly to account for the lower contribution from the sugar division due to the challenging environment.
A downside risks for FGV, it added included a weaker-than-expected economic growth leading to a lower consumption of vegetable oils, plunge in the CPO price and lower-than-expected FFB and CPO production as well as changes in policies following a change in government.
“Although we are lowering our target price (TP) to RM1.30, we upgrade the stock to ‘buy’ from ‘hold’ given the potential upside of 14% to our revised TP following the recent share-price correction, ” it said.
In the 4Q19, plantation sector lifted earnings, bringing financial year 2019 (FY19) results back to the black despite the 11% decline in CPO prices.
Analysts noted that the plantation’s group’s operational performance has been improving through lower operational costs and higher yields.
“Recall that FGV has only applied 65% of the required fertiliser in FY19, thus its CPO cost ex-mill is understated.
“Assuming a 100% fertiliser application in FY19, FGV’s CPO ex-mill cost will amount to RM1,631 per tonne in FY19 instead of RM1,503 per tonne, ” AllianceDBS Research said in a report.
The research firm believed that going forward FGV’s management is confident of keeping CPO cost ex-mill below RM1,500 per tonne on the back of full fertiliser application.
“Furthermore, we expect the recent uptrend in CPO prices to do much better in FY20 compared with FY19 despite all the headwinds affecting commodities and the global economy.” it added.
AllianceDBS is maintaining a “buy” call on the stock with a TP of RM1.80.
“The company has managed to trim costs within its control effectively. This, coupled with the recent recovery in CPO prices, would help boost FGV’s earnings strongly. We are confident that FGV will experience exponential profit growth in FY20.”
It pointed out that the decision by MSM Malaysia Holdings Bhd
(which is 51% owned by FGV) to discontinue its hedging policies would also bode well for FGV’s future earnings, as losses are not expected to be overly elevated from FY20 onwards due to risky hedging strategies.