CIMB Research upgrades FGV to Add, more upside

Going downstream: The proposed acquisition of Zhong Ling Nutri-Oil is in line with FGVHB

KUALA LUMPUR: CIMB Equities Research has upgraded Felda Global Ventures (FGV) from Reduce to Add as it expects profit to be enhanced by RM300mil from low-hanging fruits.

The research house said on Tuesday it has turned more positive on future prospects.

“We raise our sum-of-parts (SOP)  target price to RM1.73 by cutting the discount to our SOP from 30% to 15% as we see lower risk of value-destructive M&As. Key re-rating catalysts are higher yields and better-than-expected earnings post 1Q results,” it said.

Its previous target price was RM1.49 while the last traded price was RM1.38.

CIMB Research said FGV chief executive officer Datuk Zakaria Arshad’s immediate strategy is to focus on improving the earnings of FGV’s existing assets, mainly the upstream and downstream segments of its palm oil business. 

During its meeting with Zakaria, FGV will focus on improving profitability rather than revenue. There are also plans to strengthen governance as well as build a stronger, united and more motivated team to reach his eventual goal and vision, which is to bring FGV back to its glory days.

“The group will put M&A activities on the back burner and focus on realising the full potential of its core businesses. As such, we now believe the probability of the group acquiring a stake in Eagle High Plantation is low. 

“The immediate plan is to improve yields at its young estates and ensure previous M&As deliver the promised returns. Its previous plan to sell non-core assets has been put on hold, pending a review. The CEO is also prepared to cut off funding to underperforming assets.

“The CEO did not provide any hard targets but hopes to show positive results from his initiatives by end-2016. The company has started to cut administrative costs and strengthen supervision at its estates. 

“We estimate there is room to reduce administrative costs by RM200mil; and every one tonne/ha improvement in FFB yield could raise its net profit by RM100mil at an average CPO price of RM2,450 per tonne,” it said.