FGV Holdings (FGV) 1Q23’s headline PATAMI of RM12mn (QoQ: -96%, YoY: -97%) was below our and consensus estimates accounting for only 2% of full year forecast respectively. In light of the challenging business environment, marked by stiff competition and fluctuation in commodities prices, we revised lower our FY23 earnings forecast to RM234mn from RM705mn previously. This revision is based on a reassessment of our assumptions on palm oil productions, average selling price (ASP) of palm products and operating costs in plantation business, and the inclusion of losses in sugar business (please refer to MSM report dated 30 May 2023). Hence, a cut on our TP to RM1.25 from RM1.50 previously. Maintain HOLD.

• Below expectations. FGV’s 1Q23 headline PATAMI of RM12.1mn (QoQ: -96%, YoY: -97%) was below our and consensus’ expectations.

• QoQ. On quarterly basis, the uninspiring results was due to lower profit contribution from the plantation sector amid losses registered in sugar sector. Note that PBT margins from Plantation sector contracted significantly to 1.6% in 1Q23 from 10% in 4Q22 owing to 1) lower sales volume and ASP realised of CPO, 2) lower margin in downstream segment, and 3) lower share of results in joint venture of RM7.35mn vs. RM88.38mn registered in 4Q22.

• YoY/YTD. FGV reported a 97% drop in 1Q23 PATAMI on the back of a 22% decline in revenue to RM4.59bn, no thanks to 1) losses in sugar segment, 2) lower profit from Upstream palm segment as a result of lower ASP realised of CPO and higher CPO cost-ex mill of RM2,944/MT (+45%) due to an increase in manuring, upkeep and maintenance costs, 3) lower margin from downstream, fertiliser and rubber business, and 4) lower share of results from join venture amounting to RM7.35mn (-67.9% YoY).

• Outlook. We highlight the possibility of further downward pressure on the plantation business i.e., upstream and downstream segments on account of a huge pull-back in ASP of palm products, lower-thanexpected production levels and lower margin for downstream, fertiliser and rubber business segments. This pressure could be further added by an increase in operating costs across all segments as well as losses in sugar business due to higher input costs.

• Our call. Following the result, we revised our FY23 earnings forecast lower to RM234mn from RM705mn previously, and introduce FY24 earnings number to RM246mn. The changes are after taking into account our adjustment on loss in sugar business (please refer to MSM report dated 30 May 2023) and plantation sector production number, ASP realise of palm products and costs. Hence, a change on our TP to RM1.25 from RM1.50 previously based on average FY23F/24F BV/share of RM1.78 and P/BV of 0.7x (historical 5-year low average P/B). As such, we advise investors to take any stock price rally as an opportunity to lock in their profit.

Source: BIMB Securities Research - 31 May 2023