• Upgrade to NEUTRAL from Sell, with MYR1.40 TP from MYR1.30, 4% upside. 9M22 core earnings exceeded our and Street estimates. Although 4Q22F should see lower YoY FFB growth and CPO prices, we believe this is in the price, as share price has retreated 20% in last six months. Valuation is now reasonable at 7.3x FY23F P/E, in line with peers of 6-8x.

• FGV intends to rectify its low public spread of 13.05% and has appointed an advisor to provide it with options. However, investors may hold back given Bursa Malaysia’s rejection for an extension of time in August.

• 9M22 core earnings came in above expectations at 83-84% of our and consensus FY22 projections. The main discrepancies: Lower-than- expected interest costs, higher-than-expected external FFB acquired, and lower-than-expected land lease agreement (LLA) charge.

• 3Q22 FFB output rose 12% QoQ but fell 4% YoY, resulting in 9M22 FFB output falling 2% YoY. FFB growth remained similar at -2% in 10M22. FGV received 4,874 new workers as at end-September, reducing its labour shortage to 28% (from 38% at end-2Q). Since then, it has received an additional 1,600 workers, and by year-end, it hopes to add another 3,500 workers, bringing total new workers to 10,000 and the shortage to 20%. For FY23, FGV intends to apply for 5,000 workers, which will ease its shortage situation completely. With this, management is now guiding for flattish FFB output growth (from -3%) for FY22 and 10-15% in FY23. We keep our -3% assumption for FY22 but raise FY23F to 6% (from 3-4%).

• Forward sales to boost 4Q ASP. FGV achieved 3Q22 ASP of MYR4,830/tonne, 21% higher than average spot price of MYR3,970, due to forward sales. It has sold 30-40% of its 4Q22 production forward at MYR4,500-5,000/tonne, while for FY23 it has sold <5% of its output forward.

• Unit costs to rise 29% YoY. Unit costs rose 3% QoQ and 37% YoY in 3Q22 to MYR2,262/tonne on higher fertiliser and labour costs. FGV expects FY22 unit cost to come in around MYR2,300/tonne (+29% YoY), as lower output will be offset by lower fertiliser costs. FGV only managed to apply 59% of its fertiliser requirements in 9M22 and expects to be able to achieve 60-65% by year-end. For FY23, it expects unit costs to remain flat YoY, with higher fertiliser and labour costs offset by higher output.

• The sugar division remained in the red in 9M22, despite an increase in sales volume (+4.5% YoY), as raw sugar prices rose 12% YoY resulting in production costs rising 25% YoY, while utilisation rates remained low at 46% (from 44% in 9M21). Going forward, higher raw sugar prices, gas costs and USD rates would remain detrimental to earnings.

• Earnings raised. We lift earnings by 6-7% for FY22F-23F after raising external FFB assumptions, lowering interest expense and LLA charges.

• Upgrade to NEUTRAL. Our SOP-based TP (based on unchanged P/E targets) is raised slightly to MYR1.40, which includes a 12% ESG discount given its ESG score of 2.4.

Source: RHB Research - 1 Dec 2022