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Company Update

(Member of Alliance Bank group) PP7766/03/2013 (032116)

Felda Global Ventures


Plantation

Sell

18 September 2012
Analyst Team Coverage arhnue@alliancefg.com +603 2722 1565

Bloomberg Ticker: FGV MK | Bursa Code: 5222

Unexciting prospects
We downgrade FGV from neutral to SELL and concurrently lower our TP to RM3.93 from RM5.39 previously. While we have accounted for lower CPO production over the next few years due to ageing trees and replanting activities, our recent downgrade of the sector from overweight to neutral on weak export and rising inventory means our CPO price expectation need to be lowered. Accordingly, we cut our FY12 earnings by 16.1%. The stock currently trades at 19.7x FY12 P/E which is at premium to peers and market which is untenable. With the impending expiry of the lock-up period for cornerstone investors in late December, share price weakness is expected ahead.

12-month upside potential Target price Current price (as at 14 Sept) Capital upside (%) Net dividends (%) Total return (%) Key stock information Syariah-compliant? Market cap (RM m) Issued shares (m) Free float (%) 52-week high / low (RM) 3-mth avg volume (000) 3-mth avg turnover (RM m) Share price performance 1M Absolute (%) -2.0 Relative (%) -1.3 Share price chart 3M N/A N/A

3.93 4.95 -20.6 1.9 -18.7

2H12 earnings could be lower than expected


Yes 18,058 3,648 38 5.50 / 4.55 N/A N/A 6M N/A N/A

FGVs recent 1H12 earnings came within our expectations making up 39% of full year estimates. This was based on our outlook that 2H12 earnings were going to be stronger on the back of higher CPO prices. However, our outlook on CPO prices has changed, following our downgrade to the sector recently. We view that CPO prices will average at RM3,100/mt this year from RM3,300/mt previously. Given this change, we are now factoring in a RM200/mt decline in CPO ASP to our FGV earnings model and this pushes down our FY12 earnings by 12.3%. Notably, FGVs earnings sensitivity to CPO prices is higher than peers (which average at 4-7%) because of their large scale milling operations via associate company Felda Holdings Bhd (FHB). Further to this, we also lower our earnings expectations for MSM Holdings as 1H12 earnings have been lower than expected due to the higher cost of raw sugar over 1H12 that could spill over into 2H12. Our adjustment to MSM earnings brings down our forecast by another 3.8%. In total, we cut FY12 earnings by 16.1% to RM915m but leave FY13 and FY14 earnings unchanged. To note, we have a CPO ASP of RM3,100/mt for FY13 and RM3,000/mt for FY14.

Major shareholders FELDA FAHC

% 23.0 17.0

With our expectation that FGVs earnings will be on the decline for the next 3 financial years, we view that FGVs valuations continue to be expensive when compared to peers. FGV trades at a forward P/E of >19x, which is above their peers (Sime Darby, KLK and IOI) long term average of 17.2x. With earnings prospects of FGV being poorer compared to peers due to their aged hectarage and heavy replanting activities, we opine the group should trade at discount to peers, rather than at a premium. We also opine that premium valuation on the basis of impending inclusion in the FBMKLCI in December is also not tenable as investors would be better off invested in Sime Darby, IOI and KLK, all of which have larger free float and lower relative valuation.

Valuation still pricey compared to peers

Potential share price weakness when lock-up period expires

According to the prospectus, some 723.5m (19.6% of total shares outstanding) were placed out to cornerstone investors. With the 180-day lock-up period ending on 24 December, FGV may potentially come under selling pressure and this will cap its near term share price performance.

We downgrade our call on FGV from neutral to SELL. With a rebound on the stock seen over last week, we recommend for investors to lock in profits. We adjust our TP to RM3.93 from RM5.39 previously as we switch our valuation methodology from a sum-of-parts to P/E. Pegging FY13 earnings to a P/E multiple of 15.5x derives our TP of RM3.93. 15.5x is one standard deviation below the long term average P/E of Sime Darby, IOI and KLK at 17.2x.

Downgrade to SELL

All required disclosure and analyst certification appear on the last two pages of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission

Company Update | Felda Global Ventures | 18 September 2012

SNAPSHOT OF FINANCIAL AND VALUATION METRICS


Figure 1 : Key financial data FYE 31 Dec Revenue (RM m) EBITDA (RM m) EBIT (RM m) Pretax profit (RM m) Reported net profit (RM m) Core net profit (RM m) EPS (sen) Core EPS (sen) Alliance / Consensus (%) Core EPS growth (%) P/E (x) EV/EBITDA (x) ROE (%) Net gearing (%) Net DPS (sen) Net dividend yield (%) BV/share (RM) P/B (x)
Source: Alliance Research, Bloomberg

FY10 5,804.6 1,078.8 957.1 1,184.4 932.0 980.1 25.3 26.6 150.8 18.6 16.9 3.40 -

FY11 7,474.8 1,325.4 1,199.8 1,372.0 942.2 1,149.7 25.6 31.2 17.3 15.9 15.1 79.5 77.8 4.00 15.4

FY12F 12,902.3 1,369.4 1,215.2 1,396.1 914.9 914.9 24.8 24.8 84.8 (20.4) 19.9 13.4 16.8 Net Cash 9.3 1.9 1.48 3.4

FY13F 13,009.1 1,422.4 1,219.1 1,429.2 933.9 933.9 25.3 25.3 77.8 2.1 19.5 13.5 15.8 Net Cash 9.5 1.9 1.60 3.1

FY14F 12,873.1 1,366.4 1,128.2 1,312.3 842.3 842.3 22.9 22.9 70.0 (9.8) 21.6 14.7 13.3 9.3 8.6 1.7 1.72 2.9

Figure 2 : Forward P/E trend


P/E (x) 23 P/E Average P/E +1/-1 SD +2/-2 SD

Figure 3 : Forward P/B trend


P/BV Average P/BV +1/-1 SD +2 / -2 SD

P/BV (x) 3.8 3.7

22

3.6 3.5

21

3.4 3.3

20

3.2 3.1

19
2012

3.0
2012

Source: Alliance Research, Bloomberg

Source: Alliance Research, Bloomberg

Figure 4 : Peer comparison Target price (RM) 11.70 5.19 23.80 3.93 10.45 4.21 2.65 Share price (RM) 9.80 5.14 22.36 4.95 9.33 3.48 2.47 Net Dividend Yield (%) CY12 CY13 3.2 3.0 2.9 1.9 1.3 2.9 5.5 2.8 3.2 3.0 3.3 1.9 1.4 2.9 6.2 2.9

Company Sime Darby IOI Corporation Kuala Lumpur Kepong Felda Global Ventures Genting Plantations IJM Plantations Kim Loong Resources Average

Call T. Buy Neutral Neutral Sell T.Buy Buy Neutral

Mkt Cap EPS Growth (%) (RM m) CY12 CY13 58,892.7 33,042.1 23,869.4 18,058.3 7,080.0 2,790.0 762.3 10.3 5.4 -9.1 -20.4 -3.2 6.9 37.2 1.8 6.9 5.8 14.4 2.1 7.2 13.3 -8.5 7.1

P/E (x) CY12 CY13 13.7 17.1 20.8 19.9 16.6 17.2 8.2 16.0 12.8 16.2 18.2 19.5 15.4 15.2 8.9 15.0

P/BV (x) CY12 CY13 2.2 2.6 3.3 3.4 2.0 1.9 1.5 2.6 2.0 2.4 3.0 3.1 1.8 1.7 1.4 2.4

ROE (%) CY12 CY13 16.1 14.6 15.0 16.8 12.0 11.0 18.2 15.4 15.8 14.3 16.1 15.8 11.7 11.4 15.9 15.2

Source: Alliance Research, Bloomberg

Share price date: 14 Sept 2012

Company Update | Felda Global Ventures | 18 September 2012


Figure 5 : Earnings revision Previous EPS Sen 2012F 2013F 2014F
Source: Alliance Research

Revised EPS Sen 24.8 25.3 22.9

Change % -16.1% 0.0% 0.0%

29.6 25.3 22.9

Figure 6 : CY13 P/E vs EPS growth

Figure 7 : Estimated FBMKLCI weighting Company Sime Darby IOI Corp KL Kepong Felda Global Ventures Index weighting 8.50% 4.60% 2.30% 2.10%

Source: Alliance Research

Source: Alliance Research

Company Update | Felda Global Ventures | 18 September 2012

Felda Global Ventures


Balance Sheet FY 31 Dec (RM m) PPE Investment properties Property development Inventories Receivables Other assets Deposit, bank and cash Total Assets LT borrowings ST borrowings Payables Other liabilities Liabilities Share capital Reserves Shareholders' equity Minority interest Total Equity Total Equity and Liabilities 2010A 2011A 1,704 11 464 2,943 4,307 1,723 11,152 1,883 762 505 5,994 9,144 2,668 (1,483) 1,185 823 2,008 11,152 2012F 2,050 11 1,414 3,412 4,534 3,339 14,760 1,830 662 423 5,452 8,367 3,684 1,753 5,437 955 6,393 14,760 2013F 2,701 11 1,426 3,420 4,779 2,405 14,742 1,777 562 426 4,979 7,744 3,684 2,220 5,904 1,093 6,998 14,742

Financial Summary
2014F 3,166 11 1,411 3,410 5,002 1,599 14,599 1,724 462 422 4,430 7,038 3,684 2,641 6,325 1,235 7,561 14,599 Income Statement FY 31 Dec (RM m) Revenue EBITDA Depreciation & amortisation EBIT Net interest expense Share of associates Pretax profit Taxation Minority interest Net profit Adj net profit Key Statistics & Ratios FY 31 Dec Growth Revenue EBITDA Pretax profit Adj Net profit Adj EPS Profitability EBITDA margin Net profit margin Effective tax rate Return on assets Return on equity Leverage Total debt / total assets Total debt / equity Net debt / equity Key Drivers FY 31 Dec (RM m) CPO ASP Malaysia (RM/mt) FFB Matured Yield (mt/ha) Valuation FY 31 Dec EPS (sen) Adj EPS (Sen) P/E (x) EV/EBITDA (x) Net DPS (sen) Net dividend yield BV per share (RM) P/BV(x)

Price Date: 14 September 2012


2010A 5,805 1,079 (122) 957 (139) 391 1,184 (255) 3 932 980 2011A 7,475 1,325 (126) 1,200 (103) 329 1,372 (357) (72) 942 1,150 2012F 12,902 1,369 (154) 1,215 (79) 227 1,396 (349) (132) 915 915 2013F 13,009 1,422 (203) 1,219 (60) 245 1,429 (357) (138) 934 934 2014F 12,873 1,366 (238) 1,128 (63) 223 1,312 (328) (142) 842 842

2010A

2011A

2012F

2013F

2014F

101.5% 482.2% 152.9% 150.8% 150.8%

28.8% 22.9% 15.8% 17.3% 17.3%

72.6% 3.3% 1.8% -20.4% -20.4%

0.8% 3.9% 2.4% 2.1% 2.1%

-1.0% -3.9% -8.2% -9.8% -9.8%

Cash Flow Statement FY 31 Dec (RM m) Pretax profit Depreciation & amortisation Change in working capital Net interest received / (paid) Tax paid Others Operating Cash Flow Capex Others Investing Cash Flow Issuance of shares Changes in borrowings Dividend paid Others Financing Cash Flow Net cash flow Forex Beginning cash Ending cash

2010A -

2011A 1,372 126 (3,743) (141) (357) 354 (2,390) 130 130

2012F 1,396 154 (1,501) (115) (349) 359 (57) (1,000) 115 (885) 4,227 (153) (457) (473) 3,142 2,201 1,723 3,339

2013F 1,429 203 (16) (108) (357) 388 1,539 (1,200) 108 (1,092) (153) (467) (548) (1,168) (721) 3,339 2,405

2014F 1,312 238 20 (101) (328) 394 1,535 (1,000) 101 (899) (153) (421) (530) (1,104) (468) 2,405 1,599

18.6% 16.1% 32.2% -

17.7% 12.6% 34.3% 8.4% 79.5%

10.6% 7.1% 25.0% 6.2% 16.8%

10.9% 7.2% 25.0% 6.3% 15.8%

10.6% 6.5% 25.0% 5.8% 13.3%

0.24 2.23 0.78

0.17 0.46 -0.16

0.16 0.39 -0.01

0.15 0.34 0.09

2010A -

2011A -

2012F 3,100 19.3

2013F 3,100 19.6

2014F 3,000 20.4

(542) (61) (603) (2,863) (0) 4,587 1,723

2010A 25.3 26.6 18.6 16.9 -

2011A 25.6 31.2 15.9 15.1 0.32 15.4

2012F 24.8 24.8 19.9 13.4 9.3 1.9% 1.48 3.4

2013F 25.3 25.3 19.5 13.5 9.5 1.9% 1.60 3.1

2014F 22.9 22.9 21.6 14.7 8.6 1.7% 1.72 2.9

Company Update | Felda Global Ventures | 18 September 2012

DISCLOSURE
Stock rating definitions
Strong buy Buy Neutral Sell Trading buy High conviction buy with expected 12-month total return (including dividends) of 30% or more Expected 12-month total return of 15% or more Expected 12-month total return between -15% and 15% Expected 12-month total return of -15% or less Expected 3-month total return of 15% or more arising from positive newsflow. However, upside may not be sustainable

Sector rating definitions


Overweight - Industry expected to outperform the market over the next 12 months Neutral - Industry expected to perform in-line with the market over the next 12 months Underweight - Industry expected to underperform the market over the next 12 months

Commonly used abbreviations


Adex = advertising expenditure bn = billion BV = book value CF = cash flow CAGR = compounded annual growth rate Capex = capital expenditure CY = calendar year Div yld = dividend yield DCF = discounted cash flow DDM = dividend discount model DPS = dividend per share EBIT = earnings before interest & tax EBITDA = EBIT before depreciation and amortisation EPS = earnings per share EV = enterprise value FCF = free cash flow FV = fair value FY = financial year m = million M-o-m = month-on-month NAV = net assets value NM = not meaningful NTA = net tangible assets NR = not rated p.a. = per annum PAT = profit after tax PBT = profit before tax P/B = price / book ratio P/E = price / earnings ratio PEG = P/E ratio to growth ratio q-o-q = quarter-on-quarter RM = Ringgit ROA = return on assets ROE = return on equity TP = target price trn = trillion WACC = weighted average cost of capital y-o-y = year-on-year YTD = year-to-date

Company Update | Felda Global Ventures | 18 September 2012

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