FGV: Market Over-reaction?

Results Update

In QE30/9/2016, FGV reported a net loss of RM23 million due to poorer performance for all its 5 divisions (Palm Upstream, Palm Downstream, Sugar, TMLO & Others). However it must be noted that Palm Upstream reported lower profit of 39.4% q-o-q mainly due to higher fair value charge of RM105.32 million on LLA compared to RM12.24 million charged in preceding quarter (QE30/6/2016). Excluding the LLA effect, the segment’s profit would have been RM195.67 million compared to RM161.25 million in preceding quarter and the FGV would not have reported a net loss for the quarter.


Table 1: FGV's last 8 quarterly results


Graph 1: FGV's last 14 quarterly results

Reported Fraud In Turkish Operation

In the notes to the account (under Prospects on Page 32), it was reported that "(t)he performance of the Group for the quarter was dragged down by the significant losses suffered by one of the jointly controlled entity due to stock losses discovered in this quarter." We now learned that the loss was due to fraud in its 50%-owned unit in Turkey, which resulted in a stock loss of RM57million. For more, go here.

This reported fraud, which has been included into its latest quarterly result (surreptitiously), has caused a further selldown of FGV shares today. FGV suffered a selldown yesterday when it reported a net loss when nearly every plantation companies were reporting better results. In my opinion, the market could be over-reacting to the negative news.

Industry Outlook

From the chart below, we can see that CPO is in an uptrend line, with support at RM2700. At this price, the profit for plantation companies is very substantial.


Chart 1: CPO's daily chart as at Nov 23, 2016_4.00pm (Source: ifs.marketcenter.com)

Technical Outlook

FGV has dropped back significantly from its recent high of RM2.40-2.50. It may test the support from the horizontal line at RM1.50. This should be a good support level for a bottoming phase to form. At this level, funds may begin to accumulate for a recovery play which will be driven by higher earnings as well as speculative buying ahead of 2017-2018 General Election.


Chart 2: FGV's daily chart as at Nov 23, 2016_4.00 (Source: Shareinvestor.com)


Chart 3: FGV's weekly chart as at Nov 23, 2016_4.00 (Source: Shareinvestor.com)

Conclusion

Based on expected return to profitability, better prospects for the plantation sector, a more transparent management team and potential speculative play ahead of next General Election, I believe FGV is a good stock to buy at the present price level.

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.