Kenanga Research & Investment

FGV Holdings - Weaker CPO Prices Ahead

Publish date: Thu, 01 Dec 2022, 11:26 AM

FGV’s 9MFY22 results disappointed as YTD realised average CPO price of RM4,989/MT is set to soften along with seasonally weaker FFB output moving into the fourth quarter. Loss from sugar division is also likely to continue beyond FY22 into early FY23. We cut our FY23-24F net profit forecasts by 9-14%, reduce our TP by 10% to RM1.40 (from RM1.55) and maintain our MARKET PERFORM call.

9MFY23 core net profit came within 75% and 78% of our full-year forecast and the full-year consensus estimate, respectively. However, we deem the results below expectation as weaker CPO prices and seasonally lower FFB output are anticipated for 4QFY22.

3QFY22 core net profit of RM257m (-30% QoQ, -37% YoY) was dampened by lower plantation pre-tax profit as well as higher sugar division’s pre-tax losses (LBT). Plantation pre-tax profit fell to RM431m (-31% QoQ, -10% YoY) on a combination of lower but still decent CPO price of RM4,830/MT (-8% QoQ, +27% YoY) and higher ex-mill CP cost of RM2,262 (+3% QoQ, +39% YoY). Harvesting-wise, FFB output was up seasonally by 12% QoQ but down 4% YoY due to labour shortfall. Sugar division’s LBT worsened from RM29m a quarter ago to RM71m (versus PBT of RM18m in last year’s third quarter). MSM’s sugar operations were badly hit by a 20% YoY increase in costs, which ranged from the higher cost of raw sugar to higher freight, gas as well as packaging costs. MSM Johor was also running below capacity, with only one boiler operating as the other one is undergoing a major overhaul. Overall, FGV managed to still grow 9MFY22 PBT by 45% YoY but mainly on the strength of the 1HFY22 plantation performance.

Headwinds are aplenty ahead. Since early June, CPO prices have fallen sharply on improving supply. However, as demand is expected to recover moving into 2023, CPO prices should still stay relatively firm. Moreover, elevated fossil fuel prices are also propping up demand for biofuels. Economic slowdown may dampen demand but it would have to be a very severe and protracted one as palm oil is an essential product, consumed mostly as food (c.70%) but also as fuel (c.20%). We are nudging up FY22F CPO price for FGV from RM4,500 to RM4,800 per MT but lowering our FY23 assumption from RM4,000 to RM3,800 per MT. In view of the sugar losses, MSM is seeking higher retail price ceiling from the Malaysian government but approval is likely only in FY23, possibly even after Hari Raya Aidilfitri in April 2023. CEPS for FY22-23F are trimmed by 9-14% to 32.7-22.5 sen largely on higher cost in the case of FY22 but also lower CPO price assumption for FY23.

Mandatory take-over offer (MO). Controlling shareholder, FELDA, triggered an MO to acquire FGV at RM1.30/share in Jan 2021. Since then, FELDA’s stake in FGV has risen from 51% to 81%. Hence. FGV no longer meets the 25% minimum public shareholding listing requirement. After successfully extending the MO several times, FELDA failed to do so in Aug 2022. As FELDA can easily pare its stake in FGV to meet Bursa’s requirement, it is likely that the original intention of taking FGV private remains intact. The share price has also fallen from a high of RM2.12 to close at RM1.35, so continual market accumulation is one of several possible options.

Maintain MARKET PERFORM but cutting TP from RM1.55 to RM1.40 based on a combination of target FY23F NTA at 1.1x P/NTA (FGV’s historical average) and a 20% discount due to uncertainty over how FELDA will address the issue of minimum public shareholding spread. We adopted P/NTA over the more conventional PER for FGV as we find it more stable as FGV earnings can be volatile, including losses over FY18-19. FELDA’s MO price of RM1.30 in Jan 2021 was also close to 1.1x the then FY20 historic RM1.17 NTA per share. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Risks to our call include: (i) weather impact on edible oil and sugar supplies, (ii) unfavourable commodity prices fluctuations, and (iii) production cost inflation.

Source: Kenanga Research - 1 Dec 2022

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