Felda Global Ventures

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1 Refer to important disclosures at the end of this report Version 14 Bloomberg: FGV MK Reuters: FGVH.KL AllianceDBS Research, Malaysia Equity 24 Nov 2017 HOLD Last Traded Price ( 23 Nov 2017): RM1.84 (KLCI : 1,721.27) Price Target 12-mth: RM1.85 (1% upside) (Prev RM1.50) Shariah Compliant: Yes Analyst Marvin KHOR marvinkhor@alliancedbs.com What s New 3Q/9M17 core earnings beat expectations, turning around y-o-y and q-o-q Sugar segment turned around on lower raw material costs; Plantations lifted by volume rebound Growth outlook for FFB improved as yields start to normalise, expect more earnings stability Raise FY17/18/19F earnings by 77%/20%/9% for better Sugar margins and improved FFB yields, TP raised to RM1.85 maintain HOLD Back to shipshape? Earnings start to stabilise. FGV produced a strong 3Q performance to maintain its 9M17 core earnings turnaround, in part due to its Sugar arm swinging back into the black as raw sugar prices ease. Plantations operations also benefited from continuingly firm CPO prices, while FFB yields began to normalise as labour issues were worked through. We think the rebound in bottomline and improved corporate and management stability will also improve investor sentiment on the stock. Following our earnings revisions, our TP rises to RM1.85 maintain HOLD. Where we differ. Plantations segment has room to improve. Consensus views are quite diverged on FGV. Our forward year (FY18 onwards) forecasts are higher than the market average as we pencil in the normalisation of margins, vs some forecasts of continued loss-making or minimal profits. Price Relative RM Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 (LHS) Relative KLCI (RHS) Relative Index Forecasts and Valuation FY Dec (RM m) 2016A 2017F 2018F 2019F Revenue 17,241 17,423 17,917 18,503 EBITDA 985 1,154 1,388 1,534 Pre-tax Profit Net Profit Net Pft (Pre Ex.) (156) Net Pft Gth (Pre-ex) (%) (38.0) nm EPS (sen) EPS Pre Ex. (sen) (4.3) EPS Gth Pre Ex (%) 38 (226) Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) nm P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (sen): Other Broker Recs: B: 1 S: 2 H: 9 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Potential catalyst. Bottomline improvement. The key barrier to FGV s re-rating is the persistence of weak profitability and/or losses. Improvements on this front in the near term via stronger Sugar segment earnings or effective cost measures will help buoy its share price. Valuation: Our DCF-based TP is raised to RM1.85, which takes into account our revised CY17/18/19F CPO price forecasts of RM2,760/2,620/2,600 per MT. Maintain HOLD. Key Risks to Our View: A consistent delivery of profitability above our forecasted levels may enhance the stock s fundamentals, which will bode well for its share price performance. At A Glance Issued Capital (m shrs) 3,648 Mkt. Cap (RMm/US$m) 6,713 / 1,633 Major Shareholders (%) Lembaga Kemajuan Tanah Persekutuan 20.0 Federal Land Development Authority 12.4 Lembaga Tabung Haji 7.9 Free Float (%) m Avg. Daily Val (US$m) 2.7 ICB Industry : Consumer Goods / Food Producers Refer to important disclosures at the end of this report ed: CK / sa:bc, PY

2 WHAT S NEW Sugar and volume uplift helped sequential rebound Comfortably in the black. FGV announced a 3Q17 headline profit of RM38.8m (turned around y-o-y, +50% q-o-q), which after stripping out net LLA charges and impairments reveals core earnings of RM78.2m, turning around both y-o-y and q- o-q. Thus, 9M17 core earnings came to RM124.5m, which was ahead of expectations. An interim dividend of 5 sen was also announced with an ex-date of 7 Dec (vs none last year). Plantations were lifted by better yields and prices. 3Q17 Plantations EBIT (pre-lla charges) was also firmly stronger at RM206.4m (+35% y-o-y, +15% q-o-q), driven by higher CPO production of 844.7k MT (+8% y-o-y, +18% q-o-q). This in turn was supported by FFB volume recovery to 1.23m MT (+10% y-o-y, +18% q-o-q) as FFB yields leapt to 4.44 MT/ha (+7% y-o-y, +17% q-o-q). The other key contributor was CPO ASPs of RM2,665/MT (+7.5% y-o-y, -4.5% q-o-q). 9M17 Plantations EBIT thus came to RM490m, or 78% higher y-o-y. Much needed Sugar segment turnaround. The Sugar segment returned to positive EBIT in 3Q17 to the tune of RM23.3m, though still 32% lower y-o-y which represents a swifter breakeven than we had expected. This recovery was spurred by the lower raw sugar prices (-11% q-o-q), which helped restore margins. This reduced 9M17 Sugar LBIT to RM17.9m (vs EBIT of RM137.6m in 9M16). Group projecting higher optimism, especially on output. In its earnings call, management retained its FFB output target of 4.3m MT in FY17 (+10% y-o-y), supported by improving yields from both rising young palm contributions and progress towards getting its optimal number of workers. This implies a potential 31% rise for 4Q17 output given the small base in 4Q16. Further, the group expects FFB growth in FY18 to rebound to 13%, given a full year of yield normalisation and assuming no weather anomalies. Core earnings on a good path. The group is expecting CPO prices to be stable around the RM2,600-2,800/MT level in the coming months, which together with its volume trajectory, imply strong Plantations earnings ahead. On its Sugar arm, raw sugar prices are also expected to stay around the current levels, thus giving rise to more profitable margins. All in, the outlook for core earnings is strong though 4Q17 may be marred by some one-off items as financial housekeeping activities are carried out, including some impairments and the likely sale of its stake in AXA Affin. With regard to cost measures, the group is also carrying a VSS exercise plus plans to apply more stringent controls to its capex going forward. More comfort in improved stability. We raise FY17/18/19F earnings by 77%/20%/9%, mainly on increasing FFB output assumptions by +7%/+9%/+9% for normalising yields (implying FFB growth of +8%/6%/2%); plus lifted margins for FY17F Sugar operations plus rising ASP for Plantations. The large swings are due to FGV s presently thin margins the implied net margins are still <2%. We think that the resumption of earnings consistency plus corporate and management stability will help ensure operational efficiency. After the earnings adjustments, our DCF-based TP is also raised to RM1.85. That said, even after revisions, we find that prospects are well baked in at the current share price maintain HOLD. Page 2

3 Quarterly / Interim Income Statement (RMm) FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue 4,192 4,224 4,149 (1.0) (1.8) Cost of Goods Sold (3,733) (3,825) (3,552) (4.9) (7.1) Gross Profit Other Oper. (Exp)/Inc (438) (240) (497) Operating Profit (37.1) Other Non Opg (Exp)/Inc nm nm Associates & JV Inc (58.5) nm (43.9) Net Interest (Exp)/Inc (23.2) (33.8) (30.2) (30.1) 10.5 Exceptional Gain/(Loss) 63.0 (47.2) 39.4 (37.5) (183.5) Pre-tax Profit , Tax (23.2) (58.4) (60.3) Minority Interest (52.6) (2.9) (15.3) Net Profit (73.6) nm 49.6 Net profit bef Except. (10.6) (21.2) 78.2 nm (468.0) EBITDA (37.6) nm (37.5) Margins (%) Gross Margins Opg Profit Margins Net Profit Margins (1.8) Source of all data: Company, AllianceDBS Page 3

4 CRITICAL DATA POINTS TO WATCH Critical Factors Vast, but relatively old hectarage. FGV has c.338k ha of oil palm planted land in Peninsular Malaysia, the bulk of which (c.300k ha) is held under the Land Lease Agreement (LLA) it has with the Federal Land Development Authority (FELDA). It also has c.13k ha of plantations in Sabah from its acquisition of Pontian United Plantations in 2013, 13.5k ha in Sarawak from Asian Plantations Ltd in 2014, and 8.5k ha from Golden Land in Its overall age profile is old/mature as 40% of trees are 20 years or older. To remedy the age issue, FGV had earlier committed to a replanting scheme of 15k ha per year. We otherwise do not expect much new planting to commence as replanting is a higher priority. Expect a dip in production. We expect FGV to process c.13.7m MT of FFB in FY17 from its own plantations, FELDA settlers and third parties. FY17F CPO production expectation of c.2.9m MT (+8% y-o-y) relies on the sustainability of FFB yields from these sources. We view this as an indicator to focus on, as production in 2016 had been severely impacted by the lack of rainfall in CPO prices. Over 50% FGV s top-line comes from the sale of CPO and RBD (refined, bleached & deodorised) products. Growth in the ASP of CPO and the RBD products will be reflected in its revenue. Sugar arm contributions. FGV has a 51% stake in listed sugar manufacturer MSM Malaysia. It is the most profitable division as pretax contribution has been larger than group PBT, despite making up c.15% of revenues. However, PBT had come down 59% in 2016 due to higher raw sugar costs, which resulted in the group falling into the red. However, a hike in the retail sugar price came in March 2017 came as a relief to help ease margin pressures. Furthermore, following a fall in raw sugar costs in 3Q17, the unit managed to return to the black. Rubber plantation exposure. FGV derives c.5% of revenue from the sale of rubber products, comprising latex concentrate, Standard Malaysian Rubber (SMR), Standard Indonesian Rubber (SIR) and Cambodian Standard Rubber (CSR). Over 110k MT of rubber products are processed per year at its seven assets across the region, though management estimates its total capacity at around 258k MT. FGV also owns 12.4k ha of planted rubber land in Malaysia, with 3.5k ha unplanted CPO price (RM/MT) Mature palm oil hectarage CPO produced (k MT) Sugar revenue (RM m) Average USD/MYR Source: Company, AllianceDBS Page 4

5 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Company Guide Appendix 1: FGV price correlation with critical factors Graph 1: Share price vs key benchmarks Indexed: Jun12 = FGV MK FBMKLCI KLPLN Index Spot CPO price (RM/mt) Expectations of weaker earnings Entrance of new CEO 25 0 First instance of headline losses in 3Q14; acquisition of Asian Plantations Ltd Proposed acquisition of Eagle High Plantations stake Weaker than expected 2Q16 announcement Source: Company, Bloomberg L.P., AllianceDBS FGV share price vs operating margins and core profit Remarks Indexed: Jun12 = FGV MK Operating margin Core profit FGV s share price tracks the performance of its operating margins and core earnings. Negative share price movements were seen as FGV sunk into core losses since 4Q Source: Company, Bloomberg L.P., AllianceDBS FGV share price vs CPO prices Remarks Indexed: Jun12 = FGV MK Spot CPO price (RM/mt) FGV CPO production Over a prolonged timeframe, FGV s share price appears to be not heavily influenced by CPO prices. The relationship only held from its listing to end-2014 (correlation coefficient of >0.7), following which FGV s valuation became more impacted by its profitability (or lack thereof). 0 Source: Company, MPOB, Bloomberg L.P., AllianceDBS Page 5

6 Balance Sheet: Borrowings manageable for now but cash flows are pressured. FGV has is maintaining a net debt-to-equity of about 0.6x due to a cash pile of c.rm2.5bn at end-dec However, due to a thin free cash flow base, we forecast negative net cash flow which will cut into its liquidity. Thus, any deterioration in performance may require more debt to be taken on Leverage & Asset Turnover (x) Share Price Drivers: Sustainably improving profitability. FGV s fundamental performance is limited by its low margins relative to its peers despite its sizeable turnover. Management intends to look at various initiatives to manage its cost base, including staff-related measures. If these efforts are successful, FGV may re-rate. Key Risks: Volatility in commodity prices and exchange rates. Continued depressed CPO prices would hurt earnings, especially for primarily upstream planters. Additionally, low crude oil prices may affect CPO demand for biofuel. Finally, CPO prices in ringgit terms are also directly affected by the currency s strength relative to the US dollar. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact the demand for CPO/refined oils Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure RMm 1, , , Capital Expenditure (-) 5.0% 4.0% 3.0% ROE (%) 0.7 Extreme changes in the weather. Sudden and significant changes in rainfall and humidity can affect FFB yields in the later quarters. Weather. Changes in rainfall patterns (caused by either El Nino or La Nina) will affect FFB yields with some time lag. 2.0% 1.0% 0.0% (x) PB Band (x) Company Background FGV is an integrated agri-business player with significant palm oil hectarage in Peninsular Malaysia, involved in upstream and downstream palm oil operations, including harvesting, milling, processing, refining and distribution. It also has rubber plantations, and a 49% stake in major sugar manufacturer MSM Malaysia sd: 2.68x sd: 2.08x 1.7 Avg: 1.48x 1.2-1sd: 0.88x sd: 0.28x Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Source: Company, AllianceDBS Page 6

7 Key Assumptions FY Dec CPO price (RM/MT) 2,168 2,652 2,760 2,620 2,600 Mature palm oil hectarage 272, , , , ,993 CPO produced (k MT) 3,101 2,664 2,826 3,009 3,134 Sugar revenue (RM m) 2,307 2,657 2,712 2,758 2,793 Average USD/MYR Segmental Breakdown FY Dec Revenues (RMm) Plantations 5,983 7,771 7,087 7,223 7,521 Sugar 2,307 2,664 2,712 2,758 2,793 Downstream 5,499 6,625 6,094 6,361 6,566 Others 1, ,530 1,575 1,623 Total 15,559 17,241 17,423 17,917 18,503 Income Statement (RMm) FY Dec Revenue 15,559 17,241 17,423 17,917 18,503 Cost of Goods Sold (13,613) (15,671) (15,680) (15,965) (16,430) Gross Profit 1,946 1,570 1,743 1,952 2,074 Other Opng (Exp)/Inc (1,645) (1,382) (1,371) (1,398) (1,427) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (128) (125) (132) (139) (143) Exceptional Gain/(Loss) Pre-tax Profit Tax (160) (194) (83.0) (127) (151) Minority Interest (185) (35.0) (15.7) (66.6) (64.4) Preference Dividend Net Profit Net Profit before Except. (113) (156) EBITDA 1, ,154 1,388 1,534 Growth Revenue Gth (%) EBITDA Gth (%) (0.3) (18.6) Opg Profit Gth (%) (53.7) (37.5) Net Profit Gth (Pre-ex) (%) nm (38.0) nm Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, AllianceDBS Page 7

8 Quarterly / Interim Income Statement (RMm) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 4,192 5,196 4,323 4,224 4,149 Cost of Goods Sold (3,733) (4,704) (3,947) (3,825) (3,552) Gross Profit Other Oper. (Exp)/Inc (438) (80.2) (450) (240) (497) Operating Profit (73.3) Other Non Opg (Exp)/Inc Associates & JV Inc (58.5) Net Interest (Exp)/Inc (23.2) (16.1) (33.3) (33.8) (30.2) Exceptional Gain/(Loss) 63.0 (206) 65.1 (47.2) 39.4 Pre-tax Profit (31.3) Tax (23.2) (114) 0.23 (58.4) (60.3) Minority Interest (52.6) (2.9) (15.3) Net Profit (73.6) Net profit bef Except. (10.6) (95.4) 67.6 (21.2) 78.2 EBITDA (37.6) 442 (63.1) Growth Revenue Gth (%) (16.8) (2.3) (1.8) EBITDA Gth (%) nm nm nm nm (37.5) Opg Profit Gth (%) (92.1) 1,862.7 (117.8) (316.4) (37.1) Net Profit Gth (Pre-ex) (%) (143.0) (170.8) (131.4) (468.0) Margins Gross Margins (%) Opg Profit Margins (%) (1.7) Net Profit Margins (%) (1.8) Balance Sheet (RMm) FY Dec Net Fixed Assets 9,238 10,074 10,271 10,441 10,582 Invts in Associates & JVs Other LT Assets 3,442 2,925 2,925 2,925 2,925 Cash & ST Invts 2,503 1,854 1,505 1, Inventory 2,078 2,189 2,111 2,149 2,212 Debtors 1,894 1,755 1,843 1,895 1,957 Other Current Assets 685 1,341 1,131 1,150 1,173 Total Assets 20,741 21,027 20,699 20,636 20,658 ST Debt 3,143 3,692 3,692 3,692 3,692 Creditor 1,282 1,460 1,357 1,382 1,422 Other Current Liab LT Debt 2,092 1,675 1,675 1,675 1,675 Other LT Liabilities 5,115 5,062 4,811 4,554 4,294 Shareholder s Equity 5,827 5,794 5,808 5,904 6,077 Minority Interests 2,512 2,403 2,419 2,485 2,550 Total Cap. & Liab. 20,741 21,027 20,699 20,636 20,658 Non-Cash Wkg. Capital 2,606 2,885 2,790 2,869 2,972 Net Cash/(Debt) (2,732) (3,513) (3,862) (4,232) (4,523) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, AllianceDBS Page 8

9 Cash Flow Statement (RMm) FY Dec Pre-Tax Profit Dep. & Amort Tax Paid (136) (176) (59.1) (103) (126) Assoc. & JV Inc/(loss) (59.1) (10.3) (55.4) (57.1) (58.8) Chg in Wkg.Cap. (1,313) (84.2) (106) Other Operating CF (23.9) (23.9) (25.1) Net Operating CF (253) 1, ,078 Capital Exp.(net) (1,161) (951) (974) (998) (1,021) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF (430) Net Investing CF (1,499) (731) (897) (918) (939) Div Paid (219) (73.0) (182) (182) (173) Chg in Gross Debt 1, Capital Issues (23.6) (5.7) Other Financing CF (625) (820) (254) (252) (256) Net Financing CF 183 (558) (437) (434) (430) Currency Adjustments Chg in Cash (1,553) (154) (349) (369) (291) Opg CFPS (sen) Free CFPS (sen) (38.8) (0.4) 1.55 Source: Company, AllianceDBS Target Price & Ratings History RM : 23 Nov FULLY VALUED : 14 Dec FULLY VALUED : 10 Jan FULLY VALUED : 10 Feb FULLY VALUED : 17 Feb FULLY VALUED : 01 Mar FULLY VALUED : 10 Mar FULLY VALUED : 05 Apr FULLY VALUED 19 9: 10 Apr FULLY VALUED : 17 Apr FULLY VALUED 11: 24 Apr FULLY VALUED : 11 May FULLY VALUED Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 13: 01 Jun HOLD 14: 14 Jun HOLD Note : Share price and Target price are adjusted for corporate actions. 15: 10 Jul HOLD 16: 20 Jul HOLD 17: 10 Aug HOLD 18: 14 Aug HOLD 19: 05 Sep HOLD 20: 13 Sep HOLD 21: 10 Oct HOLD 22: 10 Nov HOLD S.No. Date of Report Closing Price 12-mth T arget Price Rating Source: AllianceDBS Analyst: Marvin KHOR Page 9

10 DISCLOSURE Stock rating definitions STRONG BUY - > 20% total return over the next 3 months, with identifiable share price catalysts within this time frame BUY - > 15% total return over the next 12 months for small caps, >10% for large caps HOLD - -10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps FULLY VALUED - negative total return > -10% over the next 12 months SELL - negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date Page 10

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