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fgv_chart_29_1051FOLLOWING a surprise net loss last quarter, analysts are not expecting Felda Global Ventures Holdings Bhd (FGV) to fare much better when it releases its financials for the fourth quarter ended Dec 31, 2014 (4QFY2014), sometime next month.

There is as yet no catalysts to bring the agribusiness giant back into the black, analysts say, and to make matters worse, plantations in the East Coast have been damaged by the severe flooding last month.

Many plantation operators, especially in Kelantan and Terengganu, have been unable to harvest their crops. This will result in slower production across the board.

The group will also have to absorb the repair costs for damaged infrastructure such as roads, machinery and workers’ homes.

On Jan 15, FGV (fundamental: 2.1; valuation: 2.4) said 6.34% of its total planted area had been affected by the floods, comprising 4% in Pahang, 2% in Kelantan, 0.22% in Terengganu and 0.12% in Negeri Sembilan.

FGV suffered a loss of about RM22 million in total, news reports quoted its chairman Tan Sri Isa Samad as saying. More than 1,400ha of FGV’s oil palm plantations had been inundated by the floods, but FGV noted that it did not suffer much factory damage.

The RM22 million represents the damage incurred but not the cost of repairs.

“Over the year, the RM22 million represents a minimal figure, and that amount is split between operational losses and infrastructure,” an FGV official tells The Edge.

Operational losses are derived from the inability to harvest fresh fruit bunches (FFB) as well as those that were spoilt on trees or damaged by water. This, the official says, made up 60% or RM13 million, while infrastructure damage accounted for the remaining RM9 million.

“But the actual rebuilding cost may not be too bad because we have our own engineering outfit. So, we can do repairs on our own. For example, we can get stone and other materials for road building from our own quarries,” says the official.

The worst-hit areas were plantations in FELDA Aring and Gugusan Ciku in Gua Musang, Kelantan.

Some 2,290ha of land belonging to FELDA settlers were also affected by the floods, where RM1.5 million worth of property had been damaged.

According to the Jan 15 statement, to date, FGV has distributed RM810,000 to its employees and their families in the affected states.

Analysts believe that most of the impact from the floods will only have a bearing on the group’s bottom line in FY2015.

“Repair works will only really take off in 1QFY2015, and that’s when we will see some impact on FGV’s results,” says an analyst with a non-bank backed research house.

“But for 4QFY2014, I still expect it to be in the red, although hopefully, a smaller negative figure.”

For 3QFY2014, FGV reported its first net loss — since listing in 2012 — of RM9.3 million on the back of RM4.3 billion in revenue, its highest yet.

The investing community was caught off guard by the losses, and according to its financials published in Bursa Malaysia, FGV slipped into the red largely because of downstream losses and higher fair value losses arising from changes in land lease agreement liability.

Its downstream segment, which operates in Malaysia and Canada, posted RM105.54 million in losses, which FGV attributed to negative refining margins and its exposure to forward and futures derivatives.

FGV had, in May 2014, indicated its plans to purchase almost one million tonnes of soybean and canola oils from Quebec and Western Canada for its processing plants. It has a daily crushing capacity of 3,000 tonnes and a refining capacity of 1,200 tonnes, which account for the large derivatives purchases.

In 2QFY2014, the group bought some RM1.06 billion in soy, soy meal, soy oil and canola futures. Its derivatives book stood at RM2.34 billion as at end-September 2014.

However, the prices of soy and canola commodity futures took a downturn. The price of soybean on the Chicago Board of Trade fell 40% between May and September 2014 to US$910 per bushel. During the same period, the price of canola fell 20% to C$395 per tonne on the ICE Futures Canada.

Analysts note that FGV will likely have to write off some losses when the futures contracts start to expire in mid-2015.

Elsewhere, earnings from the sale of crude palm oil (CPO) is not expected to fare very well either, as the benchmark three-month futures fell more than 30% last year to just over RM1,930 per tonne in August. It has since regained about 15% to RM2,230 last week.

“FGV’s 4QFY2014 results are expected to be lower year on year mainly due to lower average CPO selling prices. Market CPO price during 4QFY2014 was down about 13%,” says MIDF Research analyst Nur Nadia Kamil.

“We do not expect CPO prices to rebound significantly in the near future, hence, we expect no surprises in FGV’s earnings this year,” she adds.

PublicInvest Research has also cut its earnings forecast for FGV 13% to 16% for FY2014 to FY2016 in expectation of low CPO prices and reduced FFB production due to the flooding.

“Eleven-month FFB production has come down 3.1% y-o-y, with an expectation of a more pronounced decline in December 2014 of more than 13% m-o-m. We also expect FFB production to decline 4.5% for FY2014, followed by a 1% growth for this year,” the research house said in a Jan 12 note.

Based on its forecast, FY2014 core net profit should come in at RM347.4 million on the back of RM14.66 billion in revenue. In 9MFY2014, FGV’s net profit came in at RM286.16 million with revenue at RM12.13 billion.

The group is also spending on its aggressive replanting target of 15,000ha per year. While the cost will drag earnings for now, it will also bring down the age profile of its palms, where some 50% are old (above the age of 18 years).


Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on January 26 - February 01 , 2015.

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