• FGV’s 1H22 core net profit in line with our forecast but above consensus’.
• Lower CPO price and rising costs will likely lead to a weaker 2HFY22 profit.
• We retain our Hold rating as share price is well supported by div yield of 6.6% and potential privatisation offer by FELDA. Key risk is potential delisting.

Strong 1HFY22 net profit due to high CPO price, declares 4 sen div

FGV reported a core net profit (excludes FV changes in LLA but incorporates cash LLA payments) of RM763m 1HFY22. This is significantly higher compared to the core net profit of RM128m in 1HFY21. Plantation division was the key source of earnings growth in 1HFY22 for FGV as it benefitted from higher CPO price (+58% yoy to RM5,254 per tonne) and stronger milling profit (1HFY22 of RM263m vs. 1HFY21 of RM54m) due mainly to higher OER achieved. We consider the results broadly in line with our forecast but above consensus – 1HFY22 made up 58%/73% of our/Bloomberg consensus’ full-year estimates. On a qoq basis, we estimate 2Q core net profit fell 23% due mainly to higher effective tax rate of 41% in 2Q22 vs. 27% in 1Q22 on impact of Cukai Makmur of c.RM60m recognised in 2Q22. A 4 sen dividend was declared in 1HFY22 which translates to a dividend payout of RM146m to be paid by 29 Sep 2022 – in line with our expectations.

Expect lower 2H22F profit due to lower CPO price, higher costs

FGV cut its guidance for 2022F FFB output growth to -3% from expectations of single digit growth previously due to shortage of workers. Its foreign workers coverage stands at only 62% in Aug vs. 64% at end-May which implies a shortfall of around 13,096 workers. It has secured foreign worker premits for 12,900 workers and is now looking to hire them mostly from India, and some from Indonesia. It had recently hired 647 foreign workers from India and hopes to secure around 7,000 new foreign workers by end-2022. FGV said its cost of production grew 30%/16% yoy to RM2,203/RM2,125 per tonne in 2Q/1H22 due mainly to higher fertiliser prices. It applied only 35% of fertilisers budgeted in 1H22 and may only complete 75-80% of its budgeted fertiliser programme by year-end due to shortage of workers. It guided for CPO cost of production of around RM2,000 per tonne for FY22F. FGV has forward sold 20% of its production for the remainder of the year at above RM5,000 per tonne – positive for 2H CPO price achievement. Overall, we are of the view that 2H earnings are likely to be weaker vs. 1H due to lower CPO price. Current CPO price of RM4,193/tonne is 20% below 1H22’s CPO price achievement. The 25% rise in minimum wage will also weigh on 2H costs more significantly as it was effective on 1 May 2022.

Potential privatisation and 6.6% dividend yield key support. Hold.

Bursa rejected FGV’s recent application for another six months’ extension to meet its public shareholding spread. FGV said it plans to formulate a plan to meet the public spread. Given uncertainities over its plan to meet the public spread, we keep our Hold call and target price of RM1.69 per share (30% premium to previous offer price). We see its share price being supported by the potential privatisation offer and 6.6% FY22 yield. Potential delisting remains a key risk.

Source: CGS-CIMB Research - 30 Aug 2022