• Maintain NEUTRAL, with new MYR1.80 TP from MYR2.05, 5% upside. 1Q22 core earnings exceeded our and Street estimates. While FY22F should see stronger earnings on higher CPO prices, FGV Holdings’ valuation is fair, trading at 8.3x FY23F P/E vs peers’ 8-10x. Its low public spread may also preclude long-term investors from investing, given its parent’s intention to not maintain its listing status.

• FGV booked 1Q22 core earnings of MYR427.6m, at 48-52% of our and consensus FY22 projections. The main discrepancies: Higher-than- expected FFB growth, higher-than-expected contribution from its associate and JVs as well as lower-than-expected land lease agreement (LLA) charge. Offsetting this was higher losses at its sugar wing on lower volume and increased costs. FGV posted a negative adjustment of MYR90m for its 1Q22 LLA assumptions, which we stripped out.

• 1QFY22 FFB output fell 22% QoQ but rose 11% YoY, higher than its original growth target of 6-9% for FY22. However, FFB growth moderated to 5.3% in 4MFY22, likely on higher labour shortage of 36% currently (up from 30% in 4Q21). FGV has applied for 7,900 workers and hopes to get them in by 3Q, with the first batch due by end-June. For FY22, FGV is now guiding for a slightly lower 5-8% growth, slightly above our 4-5% growth forecasts for FY22-24.

• Forward sales brought down average prices. Despite being a pure Malaysian player, FGV achieved a 1Q22 ASP of MYR5,058/tonne, which was 18% lower than the average spot price of MYR6,183, due to forward sales. FGV continues to sell 30-50% of its production 3-6 months forward, as it believes CPO prices are due for a correction, expecting prices to drop to MYR4,000-4,500/tonne by year end.

• Unit costs rose. Unit costs rose 15% QoQ and 2% YoY in 1Q22 to c.MYR2,057/tonne on higher fertiliser costs. FGV has tendered for its FY22 fertiliser at prices 150% higher YoY, which together with higher minimum wages, will result in unit costs rising 15-20% YoY.

• The sugar unit fell deeper in the red in 1Q22, as sales volume dropped 9% QoQ, while utilisation rates fell further to 43% (from 49% in FY21), raw sugar prices rose (+20% QoQ and 29% YoY). Going forward, although volume should improve, higher raw sugar prices and USD rates could prove detrimental to earnings.

• Earnings raised. We raise our CPO price assumptions to MYR5,300/tonne from MYR4,300 for 2022 and MYR4,300/tonne from MYR3,600 for 2023. All in, we raise our earnings by 16-58% for FY22F-23F.

• Maintain NEUTRAL. After rolling forward our valuation period to 2023F, our SOP-based TP (based on unchanged P/E targets) is lowered to MYR1.80 (from MYR2.05), which includes an 8% ESG discount given its ESG score of 2.6.

Source: RHB Research - 1 Jun 2022