KUALA LUMPUR, Nov 29 (Bernama) – Improved corporate governance, a new management team and effective communication are the main drivers contributing to the rise in FGV Holdings Bhd’s share price, said an analyst.
He said the company managed to reduce its trust deficit through better corporate governance, improvement in asset productivity and disposal of non-performing assets.
“If crude palm oil (CPO) remains at these elevated levels (currently trading above RM2,500 per tonne), we can see a drastic improvement in its financial performance which is not captured in consensus numbers,” he told Bernama.
In a filing with Bursa Malaysia yesterday, FGV reported that it has managed to narrow its net loss to RM262.41 million in the third quarter of 2019 (Q3 2019) from RM849.46 million recorded in the same period last year.
Revenue rose by 11 per cent year-on-year to RM3.55 billion from RM3.19 billion previously.
Accordingly, FGV shares rose by seven sen to RM1.31 at the close on Thursday, and increased to RM1.33 with 16. 95 million shares transacted at the close on Friday.
Elaborating further, the analyst said FGV’s corporate governance has improved tremendously over the past year.
From having active politicians and politically-linked persons on the board, its members are now predominantly independent non-executives who are either professionals or civil servants.
“Recently, the board sued the ex-chief executive officer and former directors -- an unprecedented move for a government-linked company.
“I believe the management is also in the process of instilling good corporate practices such as anti-bribery management system. As a result, investors can be more assured that their interests are not only secure but are of paramount importance,” he said.
He said that most of the new management team members are from Sime Darby Bhd, with significant experience in plantations and management, adding that the team met with institutional investors in Q3 2018 to communicate their turnaround plan.
“They were very aggressive with their targets for 2018 and I think there was a sense of scepticism at the start.
“Despite missing their targets for the production of fresh fruit bunches and crude palm oil (CPO) as well as yield in 2018, they exceeded their target for CPO production cost.
“For 2019 they had also set ambitious targets, and although they are still behind on some metrics, we can see that it is gradually improving every quarter,” he said.
The analyst also attributed FGV’s positive Q3 2019 results to the management’s effective communication on its restructuring plans.
The company has exited or is in the process of exiting or paring down stakes in assets that affected its performance.
The CPO price also improved significantly, which goes straight to the company’s bottom-line, the analyst added.
“With CPO prices at this levels, along with production, yield and cost improvements, FGV’s financials should turn around in the coming quarters.
“Valuations on an enterprise value-per hectare basis is still inexpensive and earnings could surprise tremendously on the upside in financial year 2020.
“We expect analysts to turn more positive on FGV, going forward,” he added.
However, he said there is still room for improvement, especially in terms of automation, cash crop farming, improving environmental, social and governance practices and rationalising the sugar business, among others.
“But if they continue to improve productivity, rationalise costs, be transparent with investors and if the CPO level is maintained or goes higher, I believe there will be a significant upside in terms of share price,” he said.
Asked on the plantation sector outlook, he said the palm oil industry is cyclical.
“When prices fall low enough, planters stop fertilising and replanting so productivity drops and inventory tightens.
“As long as CPO continues to be the most competitively priced vegetable oil, demand should remain steady. Of course, there are other factors that affect CPO prices but at this juncture I am quite bullish on the sector as a whole,” he said.
Another plantation analyst also said the plantation sector has a positive outlook, at least for the moment.
“After a lacklustre year in 2018-2019, we expect 2020 to be a better year for the plantation companies. We expect average selling prices for CPO to be higher in 2020 compared to 2019, underpinned by the stronger demand growth rate for palm-oil products in comparison to the production growth rate,” she said.
In a note today, RHB Research upgraded FGV to a “buy” from “neutral” with a target price of RM1.55, saying that FGV’s plantation division is expected to turn around, but predicted its sugar division to remain in the red.
“FGV narrowed its core net losses in Q3 2019, beating our expectations, although earnings were still below consensus.
“We expect earnings to continue to improve on the back of higher CPO prices. However, the upcoming disposal of loss-making JV Trurich and a stake in its loss-making Johor sugar refinery will provide a positive spike in earnings,” it said.