Despite the CPO price rally, FGV reported 1QF21 core earnings of only RM15.9m (only take in the land lease agreement cash flow payment), which is significant below our and the street expectations. The weaker-than expected results were mainly due to a jump in on external crop purchase (made up 70% of total FFB processed) cost, up 47.6% YoY as FFB price jumped from RM532/mt to RM811/mt, resulting in a total loss of RM65m for the milling business. Nevertheless, we think there will be a strong catch-up in the subsequent quarters given the CPO price momentum. No dividend was declared for the quarter. Maintain Neutral with an unchanged TP of RM1.56 pending further action from FELDA in view of their decision to delist FGV.

• Topline driven by stronger plantation sales. The Group 1QFY21 sales grew 22% YoY to RM3.4bn contributed by all core segments, namely, plantation (+27.5%), sugar (+0.4%) and logistics (8%). Plantation sales grew from RM2.1bn to RM2.8bn as recorded CPO prices jumped from RM2,669/mt to RM3,172/mt despite lower CPO sales volume by 16.3%. Meanwhile, FFB production increased by 4.3% YoY from 0.71m mt to 0.74m mt, translating into a higher yield of 2.9mt/ha. OER was lower at 20.05% vs 20.10% a year ago. Meanwhile, 51%-owned sugar segment was marginally higher at RM514.9m, supported higher capacity utilization. The higher logistics sales of RM77.3m, supported by steady contribution from transport and bulking segments.

• Marginal core earnings of RM15.9m. The Group returned to the black in the 1QFY21 with core earnings of RM15.9m compared to a loss of RM156m a year ago. The plantation segment saw a turnaround with a pre tax profit (excluding LLA) of RM93m against a loss of RM90m in 1QFY20 but below 4QFY20’s RM182m. Sugar also returned to the black with a pre tax profit of RM50.7m, led by stronger margins and lower finance cost due to early loan settlement in FY20. Earnings contribution from logistics segment rose 20.6% YoY to RM11.7m, led by a turnaround in transportation arm.

• Key takeaways from the briefing. Management expects its FFB production to grow by 2%-4% despite experiencing from worsening worker shortage issue and tightening movement control order. The Group maintains its CPO production cost of RM1,500-1,600/mt for FY21. Meanwhile, FGV has hedged forward 20% of its full-year CPO sales at around RM4k/mt level. The losses incurred from processing the external crops had resulted in negative milling margin of RM128/mt. It expects there will be a mini FFB production peak in June-July period before seeing a major peak in Oct-Nov. On the replanting activities, it targets to replant 10-15k ha mainly in Sabah and Peninsular regions. On the worker shortage issue, it is currently short by 25% of the requirement, which could result in significant drop in productivity when crops start picking up.

Source: PublicInvest Research - 31 May 2021