Stripping out i) net unrealized FX gain (RM26m), ii) reversal of impairment on asset held for sale (RM15.1m) and iii) net impairment loss on property, plant and equipment (RM29.1m) as well as adjustment for the LLA, FGV posted 9MFY22 core earnings of RM876m, mainly led by stronger plantation earnings despite losses from sugar segment. The results were above our full-year forecast, making up 81% but it met market expectations. We make no changes for our earnings projection as plantation earnings are likely to be weaker in 4QFY22 due to higher production cost. Nevertheless, we think its share price performance would be clouded by the likelihood of privatization due to lower free float. Maintain Neutral with an unchanged TP of RM1.61.

• 3QFY22 topline rose 16% YoY. 3QFY22 sales rose 16% YoY to RM6.2bn contributed by all segments, namely, plantation (+15%), sugar (+21%), logistics & others (+31%). Plantation sales climbed to RM5.4bn as average CPO prices advanced from RM3,798/mt to RM4,830/mt (9MFY22: RM4,989/mt, YoY: +44%) despite weaker FFB production recorded, down 3.6% to 1.08m mt (9MFY22: 2.86m mt, YoY: -2.1%) . 9MFY22 OER improved from 20.35% to 20.43%. Meanwhile, sales contribution from its 51%-owned sugar business increased by 21% YoY to RM665m, attributed to an increase in overall average selling price. Meanwhile, logistics sales jumped to RM109m, attributed to higher handling rate despite lower throughput in tandem with weaker FFB production.

• 3QFY22 core earnings tumbled 55% to RM176m. The Group saw its core earnings dipping from RM395m to RM176m, mainly attributed to weaker earnings contribution from plantations (-10%) and bigger losses from sugar segment. 3QFY22 CPO cost (ex-sales & windfall taxes) jumped by 39% YoY to RM2,262/mt, due to lower FFB production and increase in manuring and labour costs as a result of the minimum wage implementation. Sugar segment made a bigger loss of RM71m, attributed to higher input costs mainly on raw sugar, freight and natural gas costs. Earnings contribution from logistics segment surged by 82% YoY to RM38m, driven by the bulking business.

• Prospects. Management expects CPO price to be supported at RM4,000/mt in the 4QFY22. The Group is seeing the return of foreign workers with a target of 10k this year and 5k next year. As of now, 7.5k foreign workers from India and Indonesia have been brought in. By next year, worker shortage issue is projected to come down from 28% to 20%- 25%. Due to the rainy period, fertilizer application is expected to reach only 60% for 2022. Meanwhile, management is targeting flattish FFB production growth for FY22 and 10%-15% growth for FY23. On the forward sales, 30%-40% of 4QFY22 production has been locked in at RM4,500- RM5,000/mt while less than 5% of FY23 production has been locked in at around RM4,200/mt. It also guided that production has peaked in Oct. Lastly, production cost for FY22 is expected to inch up to RM2,300/mt from 9MFY22 average of RM2,300/mt given the weaker yield in 4Q.

Source: PublicInvest Research - 1 Dec 2022