Despite the CPO price rally, FGV Holdings reported 1HF21 core earnings of only RM86m, which was significantly below our and the street expectations, making up only 19% and 40% of full-year estimates, respectively. Despite recording higher CPO prices, earnings were lower, dragged by a 28% jump in operating cost due to a decline in FFB yield and higher CPO production cost. Nevertheless, we think there will be a strong catch-up in the subsequent quarters given higher CPO prices and also stronger sugar contribution from 51%-owned MSM. No dividend was declared for the quarter. Maintain Neutral with an unchanged SOP-based TP of RM1.56 pending a fresh privatization offer from FELDA in view of their decision to delist FGV Holdings.

• Topline driven by stronger plantation sales. The Group 2QFY21 sales rose 42% YoY to RM4.7bn contributed by all core segments, namely, plantations (+46%), sugar (+6%) and logistics (+12%). Plantation sales jumped to RM7.4bn as recorded CPO prices jumped from RM2,309/mt to RM3,333/mt despite lower CPO sales volume by %. Meanwhile, FFB production increased by 11% YoY to 1.06m mt, translating into a lower FFB yield of 4.18mt/ha. OER was slightly higher at 20.16% Meanwhile, sales contribution from 51%-owned sugar business rose to RM589m on the back of a 12% increase in both sales volume and average CPO prices. Meanwhile, logistics sales rose to RM64m, underpinned by improved contribution from transport (+9%) and bulking (+2%) segments.

• Core earnings nearly doubled to RM70m. The Group saw its core earnings jump from RM35.5m to RM70m. The plantation pre-tax profit surged from RM56.8m to RM203.5m. Sugar returned to the black with a pre-tax profit of RM23m, led by a decline in refining cost and lower borrowing cost. Earnings contribution from logistics segment rallied 56% YoY to RM20m, led by steady performance from transport and bulking activities as well as non-core businesses.

• Key takeaways from the briefing. Management expects CPO prices to remain in the range of RM4,100-4,400/mt in the 3QFY21. Despite seeing a 7% increase in the 1HFY21 CPO cost of production to RM1,825/mt, it expects to average at RM1,600/mt for the full-year, led by higher FFB production in the 2H. On the full-year FFB production, it expects to see a decline of 3%-4%. 1HFY21 FFB production showed a decline of 5% YoY. Meanwhile, 30% of the CPO sales for the rest of the year has been locked in at current price. On the vaccination progress, about 60%-65%of its local workers have been fully vaccinated while it is speeding up the vaccination for foreign workers. Lastly, the divestment of its Trurich’s Indonesian subsidiaries is at the completion stage.

Source: PublicInvest Research - 1 Sept 2021