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 FGV (5222): FELDA GLOBAL VENTURES HOLDINGS BHD : The new glove that should fly soon

During lunch time, FGV reported its 3Q20 results and its interesting how the share price is still at RM1.21.

The key highlights of FGV's 3Q20 results are:

1. Reported profit of RM136.9 million.

2. CPO price realised at RM2536 per metric tonne.

3. RM98.8 million of impairments

Looking at MSM's (FGV's 51% owned subsidiary) results report, they had an impairment of RM62.9 million. This means FGV itself, without MSM, reported impairments of RM35.9 million ( 98.8 - 62.9 ). Since FGV owns 51% of MSM, they would have recognised RM32 million ( 51% x RM62.9 million) of MSM's impairments in their results this quarter.

So what is the core profit of FGV this quarter without the non-recurring impairments? It is RM204.8 million ( 136.9 + 35.9 + 32 ).

In 3Q20, FGV reported a core net profit of RM204.8 million with CPO price of just RM2536 per metric tonne realised! What is the CPO price today? It is RM3500.

Looking at FGV's realised CPO price, we can tell that they lock-in their CPO price 1 month forward. That is, all CPO produced next month is locked in at today's prices. This means FGV should be selling their 4Q20 CPO at around RM3000 per metric tonne. How much more profit will this translate to for FGV? Assuming FGV maintains their CPO production of 856,315 metric tonnes in 3Q20, a CPO price of RM3000 per metric tonne will bring FGV an additional RM397 million in pre-tax profits in 4Q20. If CPO prices average at RM3300 until December 2020, FGV's pre-tax profit should increase by RM654 million in 1Q21.

Why is CPO price so high? It is a combination of a few factors such as high soybean prices due to poor harvest in the US and Latin America, lower CPO production due to COVID-19 where crops cannot be harvested in Sabah, Sarawak and Indonesia, rising crude oil prices, higher expected consumption as economies re-open. CPO prices are likely to be sustained at these levels. FGV is in a good position because more than 50% of their estates are in Peninsula Malaysia.

FGV's profit for 4Q20 should be around RM494.6 million ( ( RM397 million X 0.73 )  +  RM204.8 million ) assuming a tax rate of 27% since there will be windfall tax of 3% when CPO prices rise above RM2500 per metric tonne. Assuming  FGV can realise CPO prices of RM3000 per metric tonne for 4 quarters, this would mean that FGV can generate RM1.98 billion in the next 4 quarters. Remember that CPO price is now RM3500 per metric tonne, versus RM3000 being used to calculate a net profit of RM1.98 billion. You can calculate yourself profits with CPO price at RM3500 per metric tonne.

Is the termination of the LLA by Felda a worry? For sure no. This is because Felda needs to give FGV a notice of 18 months to terminate the LLA and we can be almost certain that Felda will delay this termination for a long time because CPO prices are now very high and so is FGV's profits. The compensation that Felda will have to pay to FGV will be extreme if they terminate the LLA in the next year.

CPO price chart in the last 6 months:


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