FGV’s 1Q22 core net profit of RM427.6m (+39.7% QoQ; 39.9x YoY) beat expectations, accounting for 51.4-52.5% of our and consensus estimates, due mainly to (i) higher-than-expected palm product prices, and (ii) lower-than expected LLA charges. We raise our FY22-24 core net profit forecasts by 55.7%/3.9%/4.6% mainly to account for (i) higher CPO price assumption (following recent increase in our sector-wide CPO price assumptions), (ii) higher production cost (arising from higher fertiliser cost and minimum wage hike), and (iii) lower earnings assumptions at MSM. Post earnings revision, we maintain our BUY rating on FGV, with a higher TP of RM2.53 based on 15x revised FY23 core EPS of 16.9 sen.

Better-than-expected. 1Q22 core net profit of RM427.6m (+39.7% QoQ; 39.9x YoY) beat expectations, accounting for 51.4-52.5% of our and consensus estimates. Key variances against our estimate include (i) higher-than-expected palm product prices, and (ii) lower-than-expected LLA charges. Core net profit of RM427.6m was arrived after adjusting for (i) RM90.7m revision in LLA assumption (which in turn arose mainly from changes in its long-term CPO price assumption), (ii) RM33.9m commodity gains, (iii) RM8.0m impairment loss of financial assets, (iv) RM3.0m unrealised forex gain and (v) RM3.5m net reversal of PPE impairment loss.

QoQ. Core net profit rose by 39.7% to RM427.6m in 1Q22, mainly attributable to higher realised CPO price of RM5,058/mt (vs. RM4,194 in previous quarter) and lower net LLA charge (after adjusting for RM90.7m revision in LLA assumption). All these were partly moderated by seasonally weaker FFB output, losses at 51%-owned sugar segment (MSM) and lower contribution from logistics sector.

YoY. Core net profit surged 39.9x to RM427.6m in 1Q22 (from RM10.7m in 1Q21), boosted by an 11.3% increase in FFB output, sharply higher realised palm product prices, lower net LLA charge (after adjusting for RM90.7m revision in LLA assumption), an improved contribution from logistics sector, but partly weighed down by losses at MSM.

Expecting 7,900 incoming foreign labour by 3Q22. FGV is expecting to receive ~7,900 new foreign workers by 3Q22, which should help alleviating its labour shortage issue.

FFB output guidance. FGV registered FFB output growth of 5.0% during the first 4 months of 2022, as persistent labour shortage was mitigated by more favourable weather condition (particularly in its Sabah operations) and more efficient allocation of labour (to focus on harvesting and collection activities). For FY22, management is keeping to its FFB output growth guidance of 5-8%.

Production cost guidance. Management expects FY22 CPO production to increase to RM2,100-2,200/mt in FY22 (from RM1,756/mt registered in FY21), mainly on the back of sharply higher fertiliser costs (which, on average, have gone up by ~150% vs. FY21) and minimum wage hike (which will result in ~RM60/mt increase in CPO production cost).

On ESG. FGV has recently adopted its revised recruitment and procedure guidelines and engaged with US CBP to share updates on its labour programmes and progress related to ELEVATE assessment. Management is hopeful that US CBP will uplift its Withhold Release Order (WRO) by year-end.

Forecast. We raise our FY22/23/24 core net profit forecasts by 55.7%/3.9%/4.6% mainly to account for (i) higher CPO price assumption (following recent increase in our sector-wide CPO price assumptions), (ii) higher production cost (arising from higher fertiliser cost and minimum wage hike), and (iii) lower earnings assumptions at MSM.

Maintain BUY with higher TP of RM2.53. Post earnings revision, we maintain our BUY rating on FGV, with a higher TP of RM2.53 based on 15x revised FY23 core EPS of 16.9 sen. FGV is currently trading at FY22-24 P/E of 4.8x, 10.1x, and 10.3x, respectively.

Source: Hong Leong Investment Bank Research - 1 Jun 2022