Strong 1HFY22 CNP of RM731m (+142% YoY) surpassed our estimate by 15%, and consensus’ by 30%, accounting for 64% and 75% of the FY22F earnings, respectively. QoQ, strong performance sustained into 2QFY22 on high CPO prices. We revise FY22F/FY23F core EPS (CEPS) up by 15% and 6%, respectively, but cut our TP from RM2.30 to RM1.55 whilst maintaining MARKET PERFORM call.

Thanks to firmer CPO prices of RM5,165/MT (+58% YoY), 1HFY22 CNP surged 142% YoY to RM731m bolstered by a robust 2QFY22 contribution as FGV continued to register good CPO prices. Production-wise, after a weak first quarter, a 16% QoQ recovery in 2QFY22 also helped 1HFY22 achieved an overall flattish YoY output of 1.784m MT (-1% YoY). Good oil extraction rate in 2QFY22 coupled with good forward sales further boosted milling profits. However, 51%- owned sugar subsidiary, MSM, continued posting losses in the second quarter. Overall, 1HFY22 after tax loss for MSM amounted to RM62m (compared to profit of RM45m a year ago) as raw material, energy and freight costs have risen significantly while the retail price ceiling remained unchanged.

Since early June CPO prices have fallen sharply (>30%) on seasonal supply uptrend but also aggressive Indonesian selling and still modest growth in demand. Nonetheless, this pending seasonal supply improvement is not likely to sufficiently address the ongoing edible oils supply tightness globally. More meaningful supply improvement will probably only emerge in 2023. It is noteworthy that beyond the downward pressures on CPO prices due supply uptrend, demand for edible oils has been subdued since 2020 as Covid-19 spread. However, very fundamental forces such as demographic and economic growth (urban lifestyle as well) which have been spurring 3-4% YoY annual increments in demand are likely to reassert themselves over time. Elevated fossil fuel price is another factor helping to sustain demand of biofuels. Economic slowdown can dampen demand but it will probably need a severe and protracted one. Competition-wise, palm oil is also trading at lower than usual discount to other main alternatives, notably soybean oil; hence, many plantation groups believe CPO prices should hover at around RM4,000/MT for the foreseeable future. We are maintaining CPO prices at RM4,500/MT for FY22F and FY23F at RM4,000/MT.

Mandatory Take-over Offer (MO): Controlling shareholder, FELDA, triggered the MO to acquire FGV at RM1.30/share in Jan 2021 and has raised its holdings from 51% to 82% since. Hence. FGV no longer meets the 25% minimum public shareholding listing requirement. After having successfully extended the MO several times, FELDA failed to do so in Aug 2022. There are several possible options for FELDA, which is probably still planning to take FGV private. FGV plans to appeal for an extension but failing which, among various options FELDA can take include raising the offer price or simply sell down its stake for the moment to meet Bursa’s requirement.

Maintaining our MARKET PERFORM but cutting TP from RM2.30 to RM1.55 based on: (i) target P/NTA of 1.1x which corresponds to the group’s historical average (ii) replacing FY21 NTA with FY22F’s, and (iii) a 20% discount in light of the uncertainty over how FELDA will address the issue of minimum public shareholding spread. The P/NTA is preferred over the more conventional PER for FGV due to P/NTA being a much more stable rating historically. This can be attributable to its volatile earnings, including substantial losses between FY18-19. FELDA’s MO price of RM1.30 in Jan 2021 is also about 1.1x FY20 RM1.17 NTA per share. FGV’s ESG score is average at 3-star.

Source: Kenanga Research - 1 Sept 2022