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Maintain NEUTRAL, with MYR1.50 TP from MYR1.40, 3% upside. FY22 core earnings exceeded our and Street estimates. 2023F should see lower earnings due to prevailing CPO prices, although FFB output will likely recover on improved labour force. While prospects look better, we are wary that a possible issuance of new Islamic preference shares could mean dividend dilution or worse, share dilution to existing shareholders. FGV Holdings’s valuation is fair at 7.2x FY23F P/E, in line with peers of 6-8x.
Possible issuance of new Islamic preference shares to rectify low public spread of 13.09%. This proposal is at the exploration stage and is subject to evaluation and approval by management, the Board, relevant authorities and shareholders. If approved, this could take eight months to complete. Assuming the share issue brings the public spread to 25%, this could mean a dividend dilution to existing shareholders, or a 12% shareholding dilution if the preference shares are convertible.
FY22 core earnings were above expectations at 109% and 122% of our and consensus estimates. This was due to higher-than-expected FFB output and external FFB acquired. FGV declared a final DPS of 11 sen, bringing FY22 DPS to 15 sen – a core 38% payout and net yield of 10.3%.
4Q22 FFB output rose 7% YoY, bringing FY22 FFB to +0.4% YoY, in line with FGV’s guidance but above our -3.3% projection. External and settlers FFB output grew 24% YoY in 4Q22 and 13% in FY22, higher than our 8% assumption. In January, FFB growth rose 11% YoY, on better labour conditions, as shortage at end-2022 fell to 13% (from 28% in 3Q). It hopes to receive another 5,000 workers by 1H23, thereby easing the shortage. With this, FGV is guiding 10-15% growth in FY23. We raise our internal and external FY23F growth to 9% (from 6%), with 3-5% for FY24F-25F.
Forward sales benefitted 4Q22 earnings. FGV achieved 4Q22 ASP of MYR4,432/tonne, 13% higher than the average spot price of MYR3,930, due to forward sales. FGV is less aggressive now with its forward sales, having sold 8-10% of its 2023 production forward at MYR4,000/tonne.
Unit costs to rise 5% in 2023F. Unit costs rose 14% YoY in 4Q22 to MYR2,196/tonne on higher fertiliser and labour costs, while FY22 costs rose 21% to MYR2,182/tonne. FGV only managed to apply 75% of its fertiliser requirements in FY22. For FY23, it expects unit costs to rise 5% YoY, as it utilises the remaining higher-priced fertiliser from 2022 and bears the full year impact from the minimum wage hike.
The sugar division remained in the red in FY22, despite an increase in sales volume (+2.1% YoY), as raw sugar prices rose 16% YoY resulting in production costs rising 25% YoY, while utilisation factor (UF) remained low at 46% (from 49% in FY21). Going forward, higher raw sugar prices and gas and electricity costs would remain detrimental to earnings, but UF should improve as its Johor boiler is recommissioning in March.
Maintain NEUTRAL with a higher SOP-based TP of MYR1.50. We lift earnings by 1-9% for FY23F-24F,after raising FFB assumptions and sugar earnings. Our TP includes a 12% ESG discount.
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