KUALA LUMPUR (Nov 18): Analysts upgraded FGV Holdings Bhd and raised their earnings forecasts for the company after its profit beat expectations for the third quarter ended Sept 30, 2020 (3QFY20), but they remained concerned about potential plans by the Federal Land Development Authority (FELDA) to terminate its land lease agreement and a ban on FGV’s palm oil by the US.
Hong Leong Investment Bank (HLIB) Research analyst Chye Wen Fei said in a note today that he had upgraded his rating of FGV to “buy” from “hold” with a higher sum-of-parts (SOP)-derived target price (TP) of RM1.39, from RM1.08 earlier, after he raised his enterprise value per hectare valuation of FGV’s upstream plantation segment following the better-than-expected set of financial performance.
“FGV’s 9MFY20 core net loss (for the first nine months ended Sept 30, 2020) of RM31.3 million beat our expectations due to better-than-expected palm product prices and fresh fruit bunch (FFB) output,” he said.
He revised his FY20 projection to a core net profit forecast of RM46.2 million, from a core net loss forecast of RM135.4 million earlier, to reflect higher palm product prices year-to-date (YTD) and higher FFB output assumptions.
“We raise our FY21-22 core net profit forecasts by 8%-10% to account for slightly higher FFB output and lower crude palm oil (CPO) production cost assumptions, while maintaining our FY21-22 average CPO price projections for now,” said Chye.
Affin Hwang Capital analyst Nadia Aquidah also upgraded FGV to “hold” from “sell”, and revised up her TP to RM1.31 from 99 sen previously, as she believes FGV will continue to be in the black due to a supportive CPO price environment.
“FGV recorded a higher core net profit of RM208.5 million for 3QFY20, underpinned by stronger profits from the plantation and logistics divisions on higher FFB production and CPO prices. This came in above our expectations due to a better-than-expected contribution from the plantation division,” she said.
She raised her FY20/21 core earnings forecasts by 184.7%/32.5% to take into account higher contributions from FGV’s plantation division with higher CPO average selling price (ASP) assumptions of RM2,650 per ton for 2020 and RM2,625 per ton for 2021.
“However, its share price could remain volatile due to uncertainties surrounding the land lease agreement termination news and the Withhold Release Order (WRO) issued by the US Customs and Border Protection (CBP) on FGV’s palm oil and palm products that has an adverse impact on the company’s image and reputation,” she said.
CGS-CIMB Research analyst Ivy Ng also said FGV’s 3QFY20 results were above expectations due to better-than-expected CPO prices, sugar earnings and lower fertiliser cost.
While she expects FGV to report a lower core profit for 4QFY10 due to lower FFB output, higher fertiliser cost and lease payment, she raised her FY20-22 net profit forecasts to reflect higher CPO price assumptions, higher sugar contributions and lower FFB output assumptions.
“While we are positive on the turnaround in earnings, we remain concerned over potential plans by FELDA to terminate the land lease agreement and buy back palm oil mills, which will dampen future earnings prospects of FGV. As such, we are keeping our ‘hold’ rating,” she said.
However, she raised her SOP-based TP to RM1.34, from RM1.21, to reflect RM9,500 per hectare for the leased estates versus RM8,000 per hectare in view of improving earnings.
As at the time of writing today, FGV was unchanged at RM1.22, valuing the group at RM4.45 billion.