Let’s find out if one of Malaysia’s largest palm oil companies, FGV Holdings Bhd, is still holding up.

This post was originally posted here. The contributor to this article,@Denise is one of our many community members on InvestingNote.

At a quick glance, the share price of FGV has fallen sharply ever since its 2012 IPO reference price high of 4.55 ringgit. That’s a whopping 80% drop!
However, if you have been eyeing a position in FGV, this might be a good opportunity to enter.

But before that, here’s an overview of this particular palm oil company in Malaysia.

𝘋𝘪𝘥 𝘺𝘰𝘶 𝘬𝘯𝘰𝘸?
Palm oil is one of Malaysia’s primary industries, and Malaysia is the world’s second-largest producer and exporter of palm oil after Indonesia. The volume of palm oil consumed in Malaysia (2019/2020) is 3.7Million metric tons, while the contribution of palm oil to the Malaysian GDP in 2018 is 2.8%. Exports of palm oil recorded 3.9% of total exports.

Company summary: FGV is Malaysia’s leading global agri-business and is among the largest producers of Crude Palm Oil (CPO). FGV’s operations stretch across more than nine countries in Asia, the Middle East, North America, and Europe and are focused on three main sectors: Plantation, Sugar, and Logistics. In terms of landbank, FGV has 439,725ha of land in Malaysia and Indonesia.

Did you notice the correlation between CPO prices and the share price of FGV in the following graphs?

This is because the price of CPO affects how much revenue FGV Holdings can generate from selling palm oil, which in turn affects the share price. For instance, take a look at the CPO price in year 2014 – When it dropped, so did FGV’s shares.

Of course, there are other factors besides CPO prices that explains why FGV’s shares went up or down, such as fundamental analysis as well as major news.

Here are some of the key points to take note of which could’ve attributed to its price movement, past and present:

What about the company’s outlook?
Expansion:
◦ Establishing a new sector in FMCG: Food & non-food
◦ Participating actively in a national initiative to increase Malaysia’s level of self-sufficiency in essential food products.
◦ Acquiring RedAgri (which owns the Bright Cow brand of dairy products) for its new dairy business. ‣
‣ They have 4 product categories which are fresh milk, yogurt, cheese and kefir.
‣ Its dairy business has since gained revenues of RM0.61Mil.
◦ Increasing productivity by upgrading of processing facilities in Linggi, Negeri Sembilan
◦ Added six new vegetable oil storage tanks to cater to rising market demand & fulfill the government’s B20 biodiesel mandate for the transport sector.
◦ The potential merger could bolster FGV’s fortunes and challenge rival Sime Darby Plantations Bhd’s position as the world’s top palm oil producer.

Financials:
◦ FGV returned to the black in 2QFY20 with a core net profit of RM31.9 mil.
◦ The improvement was largely due to the higher CPO price.
◦ Higher gross margin in Sugar business, which leads to a lower loss of RM54.42 Mil (compared to RM56.03 Mil loss in the previous financial period)
◦ Lower finance cost related to loan modification of the Islamic term loan.
Earnings from the 3 main sectors of FGV:

Clearly, their financials have improved; mostly due to sugar and plantation performing better. However, financials are not all there is to it. There are potential risks that you should be aware of as well before deciding if FGV’s a good investment.

Short-term Risk:
◦ Lack of details regarding the proposed merger with Syed Mokhtar Albukhary’s plantation assets on how it would create value for shareholders.
◦ Seasonal/Cyclical Factors:
(i) Rainfall pattern in Malaysia ↔ Affects harvest of fresh fruit brunches at palm oil plantations
(ii) Major holidays/festivals ↔ Demand for refined oils and sugar products in Malaysia typically increase during Hari Raya and Chinese New Year

Long-term Risk:
◦ Felda wants to take back 350,000 hectares of land leased to FGV under the Land Lease Agreement (LLA).
◦ Previous 3 CEOs have left abruptly; how long would current CEO Haris remain put? ‣ It is worth noting though, that Haris spent the last three years and nine months from 2008 to 2012 (out of his nearly six years at rival Sime Darby,) as head of the downstream business. So this is supposedly beneficial for FGV.

Closing Thoughts:
On a better note, FGV expects to recover in phases & focus on product diversification plans as well as export markets, once global markets open up from strict lockdowns. The price of CPO is also stronger, which will support 3Q20 earnings.

In addition, global palm oil demand shows a tendency to increase as the world’s total population is growing and therefore increasing the consumption of palm oil-based products. India and China will still be the largest consumption of palm oil. So this might be reassuring for a long-term view.

𝙒𝙝𝙖𝙩 𝙙𝙤 𝙮𝙤𝙪 𝙜𝙪𝙮𝙨 𝙩𝙝𝙞𝙣𝙠?
Is there room for growth for FGV Holdings?