• Maintain SELL, new SOP-based TP of MYR1.25 from MYR1.80, 17% downside. Despite having a separate sustainability report, not many ESG disclosures or improvements have been made over the past few years – which warrants a lower ESG score of 2.4 (from 2.6). FGV seems pricey at current levels – the stock is trading at 9x FY23F P/E, which is at the higher end of its peer range of 6-9x.

• CPO prices have plunged on the back of the unwinding impact of Indonesia’s export ban, as well as fears of recession, which pulled down commodity prices in general. We believe the price decline could have been slightly overdone, having fallen 44% in seven weeks – much more than the declines in soybean, crude oil and wheat prices (down 31%, 17% and 16%). While regulatory risks still exist, particularly for players in Indonesia, supply concerns may continue to haunt the sector for the rest of 2022 – in view of the logistics backlog in Indonesia and the labour shortages in Malaysia. That said, assuming these issues are resolved by end-2022, and that Ukraine is able to export its oilseed products as per the grains deal agreement signed, 2023 should continue to be a better year for supply, and prices should remain under pressure.

• ESG concerns are still present, but may have taken a backseat. However, the ESG discounts we previously assigned to valuations are still in place. We have reassessed our ESG scores by relooking at the progress made by the industry, identifying shortcomings and any room for improvement. From our analysis, we highlight that, while better disclosure on ESG-related information has been made over the years, progress in mitigating these issues is rather slow. As a result, we have raised the ESG scores of some planters that have made progress – but highlight that several peers have remained relatively stagnant in their ESG efforts, while others have even reduced disclosures.

• We tone down CPO price assumptions. We continue to expect stock levels to remain tight for the next 2-3 months, possibly until end-3Q, which would provide support for CPO prices. We trim CPO price assumptions for 2022 to MYR5,100/tonne (from MYR5,300/tonne). In 2023, as fundamentals continue to improve – assuming labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported, CPO prices could decrease even more. However, support from a ramp-up in biodiesel mandates and discretionary biodiesel demand coming back would keep CPO prices above MYR3,000/tonne in the medium term. We lower our 2023 estimate to MYR3,900/tonne (from MYR4,300/tonne). Our MYR3,500/tonne assumption for 2024 remains unchanged. As a result, we cut FGV’s FY22-24F earnings by 1-20%.

• SELL, with a lower TP of MYR1.25. Our SOP valuation comprises 10x 2023F P/E for the plantations unit, 8x 2023F P/E for the other divisions, and the current market price for its sugar business, MSM Malaysia, and includes a 12% ESG discount based on its ESG score of 2.4.

Source: RHB Research - 11 Aug 2022