FGV’s FY22 results exceeded expectations thanks to higher FFB output, firmer CPO price as well as contained cost which offset losses from the sugar unit as well as provisions. Nevertheless, with upstream margins facing compression, earnings are likely to ease. We nudge our FY23F net profit up by 6%, but maintain our TP at RM1.40 and our MARKET PERFORM call.

Good close for FY22. Core net profit in FY22 beat both our forecast and consensus estimate by 19%, thanks to a strong 4QFY22 core net profit of RM473m (+124% QoQ, +2% YoY) underpinned by robust plantation PBT despite suffering a fair value charge of RM85m versus a RM66m gain last year. This did not stop FY22 plantation PBT rising 31% YoY on strong CPO prices despite flat FFB output, YoY. However, higher losses from the sugar subsidiary, MSM, dampened group CNP to a more modest YoY growth of 14%. Cost also rose but not as significant as some of its peers as fertiliser application was held back by labour constraints. Altogether, FGV managed to end the year with lower net debt, down from RM6.4b to RM5.9b and declared a generous 11.0 sen final NDPS.

Headwinds ahead. Lower palm oil prices are expected for 2023 as edible oil supply improves. Nevertheless, firm range-bound CPO prices is expected as edible oil demand is expected to recover as: (a) post Covid demand continues to normalise after buying was postponed by high prices last year, (b) China, top edible oil market (c.40m MT), has begun relaxing zero-Covid policy and (c) demand for biodiesel looks supportive and likely to grow, led by US, Indonesia and Brazil. Indonesia is not only the 3rd largest biodiesel market but the single most important palm-based biodiesel user just raised its B30 blend to B35 on 1 Feb 2023. Indonesia is thus likely to need 1-2m MT of additional palm oil for its B35 blend and it is still aiming for a B40 blend sometime in the future. We are keeping FY23/24F CPO price for FGV at RM3,800/3,500 per MT respectlvely. In order to curb further losses, MSM has sought higher retail price ceiling of RM2.85/kg from the government but approval is likely only after Hari Raya Aidilfitri (late April), possibly in 2H 2023. CEPS for FY23 is nudged up slightly by 6% to 23.8 sen.

Mandatory takeover offer (MO). Parent, FELDA, triggered an MO to acquire FGV at RM1.30/share in Jan 2021. Its stake has since risen from 51% to 82% and no longer meets the 25% minimum public shareholding listing requirement. After extending the MO several times, FELDA failed to do so in Aug 2022. Instead, FGV is proposing to issue new Islamic preferred shares to address the issue. No detail is available but it might serve to pare debts and gearing from the proceeds without diluting EPS.

Maintain MARKET PERFORM and TP at RM1.40 based on a combination of 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 its minimum public shareholding spread. We adopted P/NTA over the more conventional PER which we find more suitable as FGV’s earnings can be volatile, such as the losses over FY18-19. FELDA’s MO price of RM1.30 in Jan 2021 was also close to 1.1x FY20 historical RM1.17 NTA per share. There is no premium to our TP based on ESG given the group’s 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 - 28 Feb 2023