1QFY22 reported robust Core Net Profit (CNP) of RM371m (- 20% QoQ, >100% YoY). Though weaker than 4QFY21, it was a sharp turnaround from the losses reported a year ago. Stronger 1QFY22 CPO prices more than offset the QoQ decline in FFB production. CPO prices may have peaked and should ease on seasonally stronger production in 2H CY22. However, CPO prices are expected to stay quite firm still for the rest of the year. We are nudging up FY22-23E Core EPS by 2% and 7% on the back of higher CPO price assumptions of RM4,500/MT and RM4,000/ MT respectively. We are maintaining our MARKET PERFORM recommendation and TP of RM2.30.

Above expectations. Thanks to firmer palm oil prices of RM5,058/MT (+21% QoQ, +59% YoY), 1QFY22 earning came in stronger YoY but weaker QoQ due to lower QoQ FFB output of 0.836m MT (-22% QoQ, +11% YoY). Compared to a Core Net Loss of RM28.6m a year ago, the sharp YoY turnaround in 1QFY22 was underpinned by stronger palm oil prices coupled with higher output. 1QFY22 would have been stronger if not for losses from MSM, FGV’s 51% subsidiary in the downstream Sugar business. MSM’s after tax losses widened from RM16m in 4QFY21 to RM28m in 1QFY22 (vs. net profit of RM31m in 1QFY21) due to higher raw material, energy and freight costs.

Outlook: The second half of this calendar year should see an improvement in supply from both palm and soyabean oils. This will be much welcomed by the tight edible oils market but will mean downward pressure on palm oil prices. However, we expect CPO prices to stay elevated as price downside is moderated by several factors such as: (a) current tight international edible oils and fats market is not likely to recover significantly until CY23 in spite of higher palm and soyabean oil supply in 2HCY22 and weaker demand due to high asking prices, (b) inventory levels of big palm oil buyers such as India and China are not very high and China has yet to fully restart its economy from Covid-19 so higher demand can be expected once its economy normalizes, and (c) high energy prices further meant there is latent demand for biofuels in the event vegetable oil prices fall sufficiently low to prompt more conversion.

Higher CPO prices of RM4,500/MT is now expected for FGV in FY22, up from RM4,000/MT previously. With expectation of palm oil prices staying firm longer, FY23E CPO price has also been revised up from RM3,500/MT to RM4,000/MT. Operating costs have also been raised to reflect not only higher fertilizer but also higher labour and transportation costs as well. All in all, we are adjusting up FY22E and FY23 EPS by 2% and 7% to 31.3 sen and 24.8 sen, respectively.

Mandatory Take-over Offer (MO): Substantial shareholder, FELDA, triggered a MO to acquire FGV at RM1.30/share in Jan 2021. Its holdings in FGV has since risen from 51% to 80%, hence the listing requirement for public investors to have at least 25% shareholding in FGV is no longer met. As FGV is now trading above RM1.30, FELDA has sought to extend the MO several times and the latest extension is till 3 Aug 2022. FELDA can raise the offer price, sell down 5% to meet Bursa’s requirement or, more likely, continue to extend the MO.

Maintaining our MARKET PERFORM as well as TP of RM2.30 which translates to a target FY21 P/NTA of 1.5x and prospective FY22E PER of 7.5x. This corresponds broadly with the Group’s historical ratings of 1.0-1.2x NTA and 8x forward PER. Among the reasons FGV tend to trade below sector PER are its earnings volatility and low ROE, as such we prefer using P/NTA with some consideration for PER as well.

Key risks include: (i) FELDA returning with a higher offer price (ii) sharper than expected rise/fall in CPO prices and (iii) higher/lower than expected cost increases.

Source: Kenanga Research - 1 Jun 2022