FGV Holdings (FGV) recorded a headline LATAMI of RM0.8mn in 1H23 versus PATAMI of RM743mn in 1H22, dragged down by challenges within the Plantation and Sugar business though partly mitigated by improvements in Logistic and Others sector. As such, FGV’s results came-in below our and consensus estimates. Given the complex and demanding business landscape characterized by fluctuations in commodity prices and sustained cost pressures, we revised lower our FY23/24 earnings forecast to RM114mn/RM134mn respectively from RM234mn/RM246mn previously. Hence, a cut in our TP to RM1.23 from RM1.25 previously. Downgrade to SELL.

• Below expectations. FGV’s 1Q23 headline LATAMI of RM0.8mn was below our and consensus’ expectations.

• QoQ. On QoQ basis, the uninspiring results was due to lower profit contribution from the plantation sector amid lower losses registered in sugar sector. Note that PBT margins from Plantation sector contracted significantly to 0.4% in 2Q23 from 1.6% in 1Q23 owing to 1) a 2.5% increase in CPO production costs ex-mill of RM3,018/MT and lower productions of FFB (-4%), CPO (-3%) and PK (-8%), 2) lower margin in downstream segment, 3) lower share of results in joint venture of RM5.2mn versus RM7.4mn registered in 1Q23, and 4) impairment loss on financial assets amounting to RM48.7mn (includes RM47.3mn impairment in Indonesia plantation assets) versus reversal of impairment of RM7.8mn in 1Q23.

• YoY/YTD. FGV reported a 98%/93% drop in 2Q23/1H23 PBT on the back of a 39%/32% decline in revenue to RM4.5bn/RM9.1bn, no thanks to 1) lower profit from Upstream palm segment as a result of lower ASP realised of CPO and higher YoY/YTD CPO production costex mill of RM3,018/MT and RM2,996/MT (+37%/41%) respectively due to an increase in manuring, upkeep and maintenance costs, 2) lower margin from downstream, fertiliser and rubber business, 3) lower share of results from JV amounting to RM5.2mn/RM12.5mn (- 55%/-64%), and 4) losses in sugar business.

• Outlook. Apart from Sugar business, we foresee additional downward pressure from the plantation business. This pressure pertains to both the upstream and downstream segments, stemming from a substantial reduction in the ASP of palm products, production levels, ongoing elevated manuring expenses due to higher fertilizer and labour costs, and weakening margins within the downstream segments.

• Our call. Following the result, we revised our FY23/FY24 earnings forecast lower to RM114mn/RM134mn respectively from RM234mn and RM246mn previously; after taking into account our adjustment on margins, costs and expenses to be more reflective of our current and future expectations of FGV’s business operations. Hence, a cut to our TP to RM1.23 from RM1.25 previously based on average FY23F/24F BV/share of RM1.75 and P/BV of 0.7x (historical 5-year low average P/B). Downgrade to SELL.

Source: BIMB Securities Research - 29 Aug 2023