FGV’s core net profit of to RM57.8m in 1H20 (vs. core net loss of -RM255.5m in 1H20) missed expectations, accounting for only 19.7-28.6% of consensus and our full-year estimates, due mainly to weaker-than-expected FFB output. We cut our FY21 core net profit forecast by 15.1%, largely to reflect lower FFB output assumption and higher earnings contribution from sugar segment. We raise our FY22-23 core net profit forecasts by 15.4% and 12.1%, mainly to account for higher earnings assumptions at sugar segment. Despite the revisions in our core net profit forecasts, we maintain our HOLD rating on FGV, with an unchanged sum-of-parts TP of RM1.48, as our valuation on FGV’s upstream plantation business (which makes up to ~90% of our valuation on FGV) is based on EV/ha.

Missed expectations. 2Q21 core net profit of RM47.0m (QoQ: +339.1%; YoY: +247.1%) took 1H21’s total sum to RM57.8m (vs. core net loss of –RM255.5m in 1H20). The results missed expectations, accounting for only 19.7-28.6% of consensus and our full-year estimates, due mainly to weaker-than-expected FFB output.

Exceptional items in 1H21. Core net profit of RM57.8m in 1H21 was arrived after adjusting for (i) RM231.2m revision in LLA assumption (which, in turn arose mainly from changes in long term FFB yield and production cost assumptions), (ii) RM23.8m commodity gain, (iii) RM0.3m impairment of financial assets, (iv) RM5.2m unrealised forex gain, (v) RM0.6m write-off, and (vi) RM11m fair value loss on derivatives.

QoQ. Core net profit more than quadrupled to RM47.0m in 2Q21 (from RM10.7m in 1Q21), boosted by crop recovery (witnessed by a 42.6% jump in FFB output), higher realised palm product prices and higher throughput and tonnage carried at logistic segment, but partly moderated by weaker sugar earnings (resulted from temporary shutdown of refinery operations).

YoY. Core net profit more than tripled to RM47.0m in 2Q21 (from RM13.6m a year ago), boosted mainly sharply higher palm product prices turnaround at 51%-owned sugar segment (MSM, as a result of higher sales volume and selling prices, lower refining and finance expenses), and better performance at logistic segment, which more than mitigated a 10.9% decline in FFB output.

YTD. 1H21 performance returned to the black with a core net profit of RM57.8m (from a core net loss of -RM255.5m SPLY), boosted mainly by sharply higher palm product prices, turnaround at sugar segment (due to reasons mentioned above), and better logistic earnings, which more than mitigated a 5.2% decline in FFB output.

FFB output growth guidance lowered further. Management guided that FFB output will decline by 3-4% in FY21 (from an earlier FFB output growth guidance of 2-4% previously), due to weak FFB output registered in 1H21 (-5.2%) and labour shortfall (current migrant labour stands at 74% of its total requirement and management believes this will likely persist into the remaining months of FY21).

CPO production cost to decline in 2H. FGV’s ex-mill CPO production cost increased to RM1,825/mt in 1H21 (from RM1,711/mt in 1H20). Despite having toned down its FFB output guidance for FY21, management still expects production cost to trend down considerably in 2H21, bringing production cost closer to ~RM1,600 in FY21, as it expects 2H21 production to come in higher than 1H21 (due to seasonality).

Update on Withold Release Order (WRO) by US Customs and Border Protection (CBP). FGV is in the midst of appointing an independent audit firm to conduct an assessment on its operations against the 11 ILO indicators of forced labour, and the audit work is expected to complete in 6-9 months (from date of appointment).

Forecast. We cut our FY21 core net profit forecast by 15.1%, largely to reflect lower FFB output assumption and higher earnings contribution from sugar segment. We raise our FY22-23 core net profit forecasts by 15.4% and 12.1%, mainly to account for higher earnings assumptions at sugar segment.

Maintain HOLD rating; TP: RM1.48. Despite the revisions in our core net profit forecasts, we maintain our HOLD rating on FGV, with an unchanged sum-of-parts TP of RM1.48, as our valuation on FGV’s upstream plantation business (which makes up to ~90% of our valuation on FGV) is based on EV/ha.

Source: Hong Leong Investment Bank Research - 1 Sept 2021