Malaysia's FGV 2015 earnings to shrink on weak CPO market

Author: Nurluqman Suratman


(recasts to reflect FGV instead of Felda in text and headline)

Focus article by Nurluqman Suratman

palm plantation in IndonesiaSINGAPORE (ICIS)--Malaysian palm oil major and oleochemicals producer Felda Global Ventures (FGV) may see its full-year earnings shrinking in 2015, following a dismal first-quarter performance because of weak crude palm oil (CPO) prices, analysts said.

FGV, the world's largest CPO producer, reported on 26 May a 98% year-on-year decline in its first-quarter net profit to Malaysian ringgit (M$) 3.6m ($989,010), as production was hit by torrential rains and floods in east Malaysia and with average CPO prices falling 12% to M$2,279/tonne.

Malaysian Kenanga Research is projecting FGV's full-year net profit to fall to M$306m from M$325m in 2014, before rebounding to M$364m in 2016.

A recent switch to toll manufacturing by the company’s refiners - wherein production services are provided to a third party under contract - should lift earnings, but FGV's overall performance will be weighed down by higher cost and falling CPO prices, it said.

FGV expects its 2015 oil palm fresh fruit bunch (FFB) production to grow at the same level as last year’s, with output recovery likely to start in May. Last year, its FFB production stood at 4.97m tonnes, with CPO production at 3.11m tonnes, down by 2% and 3%, respectively, from the previous year.

Production costs this year are expected to increase by 5% to M$1,500/tonne, with refining margins look set to stay weak in the short-term, the company said in the notes accompanying its first-quarter financial results.

“We highlight that every M$100/tonne change in CPO price could affect its [FGV’s] earnings by 4-6% per year,” Malaysia-based RHB Research said.

At the close of trade on 27 May, August CPO futures contract traded on the Bursa Malaysia stood at M$2,176/tonne.

“We maintain our bleak outlook unless [FGV] can boost net profits via earnings-accretive acquisitions and extract synergy from its previous acquisitions,” according to RHB Research.

FGV plans to dispose its Canadian soybean crushing business, which has been suffering from poor margins, by the third quarter of the year.

Malaysian securities firm PublicInvest Research has a more pessimistic view on FGV's full-year earnings, which it expects to decline by 31% to M$225m.

FGV reported a 20% year-on-year fall in its March-quarter revenue to M$2.96bn, with earnings before interest, tax, depreciation and amortisation (EBITDA) falling by 41% to M$172.6m.

Its downstream business, which includes its oleochemicals unit, incurred a bigger pre-tax loss of M$44m in the first three months of the year from M$3.8m in the previous corresponding period.

Downstream operations were affected by losses at its North American oleochemicals segment, as production was affected by blizzards that hit in January this year, and by lower soybean crush margins at its Canadian businesses, the company said.

While FGV is expected to post sequentially stronger earnings in the coming quarters, lower oil palm fresh fruit bunch (FFB) output and downstream losses will persist, Malaysia-based Maybank Research said in a note.

As of end-2014, FGV has palm plantations in Malaysia and Indonesia that cover more than 450,000 hectares.

($1 = M$3.64)

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