FGV’s core net profit of RM10.7m in 1Q21 (QoQ: -92.2%; YoY: >100%) missed expectations, accounting for only 3.6-3.8% of consensus and our full-year estimates. The earnings shortfall was driven mainly by RM65.1m losses from processing of third party crops (arising from volatile CPO prices) and lower-than expected FFB production. We lower our core net profit forecast by 28.2% to RM202.1m in FY21, mainly to account for lower FFB production assumption and RM65m losses from processing of third party crops in 1Q21. FY22-23 core net profit forecasts, on the other hand, remained unchanged. Maintain HOLD rating, with an unchanged sum-of-parts TP of RM1.48.

Missed expectations. 1Q21 core net profit of RM10.7m (QoQ: -92.2%; YoY: >100%) missed expectations, accounting for only 3.6-3.8% of consensus and our full-year estimates. The earnings shortfall was driven mainly by RM65.1m losses from processing of third party crops (arising from volatile CPO prices) and lower-than expected FFB production.

Exceptional items (EIs) in 1Q21. Core net profit of RM10.7m was arrived after adjusting for (i) RM15.4m fair value loss on derivatives, (ii) RM44.1m revision on LLA assumption (which, in turn arose mainly from change in CPO price assumption), (iii) RM11.2m commodities gain, (iv) RM6.9m impairment on financial assets, (v) RM8.7m unrealised forex gain.

QoQ. Core net profit plunged 92.2% to RM10.7m in 1Q21, as higher realised palm product prices were more than weighed down by (i) a 28.8% decline in FFB production, (ii) lower contribution from sugar segment (arising from lower margin and sales volume), (iii) lower contribution from logistic and other segment (as lower FFB production has resulted in lower throughput and tonnage carried), and (iv) higher finance cost.

YoY. 1Q21 performance turned around with a core net profit of RM10.7m (from a core net loss of -RM142.3m SPLY), boosted mainly by higher realised palm product prices and FFB production at plantation segment, turnaround at sugar segment (thanks to higher utilsiation rate and lower finance costs), and better performance at logistic and other segment (attributed to higher handling and transportation volume).

FFB output growth guidance in FY21 lowered on labour shortfall. FGV registered FFB output growth of 2% in 4M21 (at 1.07m tonnes). Management lowered its FFB output growth guidance for FY21 to 2-4% (from 3-5% previously), as it now expects labour shortfall to persist beyond 1H21 (in view on Covid-19, which will continue to affect new worker recruitment).

CPO production cost to decline in subsequent quarters. FGV registered ex-mill CPO production cost of RM2,015/mt in 1Q21 (1Q20: RM2,177/mt; 4Q20: RM1,699/mt). Management guided that CPO production cost will decline considerably to RM1,500 - 1,600/mt in FY21, on the back of higher FFB production (particularly in 2Q and 3Q).

Forecast. We lower our core net profit forecast by 28.2% to RM202.1m in FY21, mainly to account for lower FFB production assumption and RM65m losses from processing of third party crops in 1Q21. FY22-23 core net profit forecasts, on the other hand, remained unchanged.

Maintain HOLD rating; TP: RM1.48. We maintain our HOLD rating on FGV, with an unchanged sum-of-parts TP of RM1.48 (see Figure #3).

Source: Hong Leong Investment Bank Research - 31 May 2021