• Overview. FGV Holdings (FGV) reported a 24.0% drop in 3Q22 PBT despite reporting a 16% increase in revenue no thanks to 1) losses in sugar segment, 2) lower profit from plantation segment on account of fair value loss in biological assets of RM38mn versus a gain of RM16mn in 3Q21, 3) lower margin in rubber business, 4) impairment loss in rubber plantation of RM20.5mn, and 5) decline in share of results from associate and joint-ventures amounting to RM0.1mn (-75% YoY) and RM10.8mn (-45% YoY). On quarterly basis, the 36% short fall in earnings was due to lower profit contribution from Plantation segments on account of lower average selling price (ASP) of CPO/PK and lower margins from fertiliser business, losses from Sugar segment and lower share of profit from associates and joint ventures.

• Key Highlights. FGV said its foreign labour shortage has reduced to 28% from 38% of the total workforce in 2Q22. Note that FGV has recruited about 4,874 estates workers as of October 2022 (of which 848 are local recruitment) bringing year-to-date recruitment of foreign workers to c. 6,000 workers (yearend target of 10k workers).

• Against estimates: Inline. Overall, the results were within our estimate, with core PATAMI of RM812mn (+75% YoY) making up 74% of our full year forecast. The differences between reported earnings and core earnings are the gain and/or loss in fair value (FV) change on LLA, impairment, unrealised foreign exchange and the effective tax rate.

• Outlook. We see downside risk to earnings on the back of increasing operational costs, moderation in ASP of palm products and possibility of weaker production due to lower yield in lieu of prolong labour shortage. This will also be hampered by margins squeeze in sugar segment due to higher input costs and production issues in Johor refinery.

• Our call. Maintain a HOLD call with a TP of RM1.50 based on P/BV of 0.81x and BV/share of RM1.85. Our TP offers a +7.3% upside potential and coupled with the privatisation initiative by FELDA, we advise investors to take any stock price rally as an opportunity to lock in their profit. Of note, as of 21 Nov 2022, FGV’s pubic shareholding spread was at 13.06%.

Source: BIMB Securities Research - 1 Dec 2022