FGV’s reported Core Net Profit (CNP) for FY21 came in above our as well as market’s expectations by 2-3x thanks to strong palm product prices although FFB output actually declined YoY in FY21. Also, in many investors’ mind is FELDA’s plan once its Mandatory Takeover Offer (MO) for FGV expires on 15 March 2021, which we believe could have neutral outcome to minority investors. Maintain MP with a higher TP of RM2.30 (from RM1.55) @ 1.5x FY21 P/BV.

Above expectations. The strong financial performances in the fourth quarter and the full-year can be attributed to the higher commodity prices as FFB output was poorer. 4QFY21 CNP of RM463m (+14% QoQ, +238% YoY) was boosted by strong CPO price of RM4,194 per MT (+10%QoQ, +37% YoY). Meanwhile full-year CNP of RM1,168m (+380% YoY) was also mainly attributable to higher CPO price of RM3,671 (+37% YoY). FFB output fell 7% YoY to 3.98m MT. Margin from CPO milling (FGV buys FFB to process into CPO and PK) was also better than expected for FY21.An 8.0 dividend was declared for the year, a tad below our expectation of 8.5 sen

Positive CPO price outlook: Global edible oil & fats market ended 2021 with tight inventory and was hoping for some easing from good South American soyabean output. Though still ongoing, dry weather in Brazil has led to production downgrade of 5-10%. Meanwhile, labour shortfall continues to hamper Malaysian palm production. Edible oils & fats supply should still improve in 2H CY22 from seasonally higher palm output and US soyabean planting but indications suggest CPO prices to remain higher and longer than earlier anticipated. FGV is expected to enjoy CPO prices of around RM4,000/MT for FY22 and RM3,500 for FY23 instead of previous estimates of RM3,500/MT. Flattish FFB production of 4-4.2m mt is expected over FY22-23. FGV’s net debt including Land Lease Agreement (LLA) fell 14% YoY from RM7,431m to RM6,390m. Excluding LLA, net debt fell from RM3,217m at the end of FY20 to RM2,030m as at end Dec 2021.

Mandatory Take-over Offer (MO): After buying 14% from two institutional shareholders in Dec 2020, FELDA triggered the MO and offered to buy the remaining FGV shares at RM1.30 in Jan 2021. By Feb 2021, FGV’s public shareholding spread had dipped from 49.5% earlier to 24%, below the 25% requirement. The MO has since been extended several times with the latest extension expiring on15 March 2022. With holding of about 80% in FGV at the moment, FELDA has several options available including: (a) extending the MO further, (b) raise offer price to delist FGV as soon possible, (c) postpone exercise momentarily by selling 5% at a profit to meet the 25% shareholding spread.

Raising FY22E earnings by 240% on higher CPO prices but CNP is expected to trend down over FY21-23 due to: (a) prosperity tax in FY22 and (b) lower CPO prices in FY23.

Maintain MP with higher TP of RM2.30 (from RM1.55). The TP is based on 1.5x historical Price/BV ratio rather than the more usual PER due to the volatility of FGV’s earnings, from RM1,081m net loss in FY18 to the sterling FY21 results. ROEs are also rather low as a consequence. Key risks include: (i) FELDA returning with a higher offer, (ii) sharp rise/fall in CPO prices, and (iii) estates and/or operations shutdown due to COVID-19 resurgence.

Source: Kenanga Research - 1 Mar 2022