• Downgrade to SELL from Neutral, new MYR1.20 TP from MYR1.50, 10% downside. FGV Holdings’ 1Q23 results are lower than expected, and it has fallen into the red. While prospects should improve in 2H23 on better output and lower costs, its short-term outlook remains weak. Post-earnings estimates cut, it is now trading at a steep 10x FY23F P/E (peers: 6-8x).

• 1Q23 results are significantly below expectations, as FGV reversed into a core loss of MYR29.8m, against our and consensus full-year profit projections. This was due to lower-than-expected FFB output and PK prices, as well as higher-than-expected unit costs.

• 1Q23 FFB output declined by 1% YoY, below FGV’s FY23 guidance and our estimate of +10-15% and 9%. We await FGV’s analyst briefing today to see if it is keeping to its 10-15% guidance, based on its labour shortage of 11%. To be conservative, we lower our internal and external FY23F output growth to 5-6% (from 9%), and maintain FY24-25F numbers at 3-5%.

• FGV achieved 1Q23 ASP of MYR3,988/tonne (21% YoY), which is close to the average spot price of MYR4,017/tonne. FGV is less aggressive now with its forward sales, having sold 8-10% of its 2023 production forward at MYR4,000/tonne. While PK prices have not yet been disclosed, we believe this fell by a larger 50-60% YoY.

• Unit costs rose 45% YoY in 1Q23 to MYR2,944/tonne, on the back of recruitment costs for new labourers, a higher minimum wage and bigger fertiliser costs due to the utilisation of the remaining higher-priced fertiliser from 2022. FGV also paid c.MYR30m in compensation for recruitment fees to approximately 20,000 workers on 15 Mar, as a part of the first phase of its remediation plan. The group’s original guidance was for unit costs to rise 5% YoY from FY22’s MYR2,182/tonne. We increase our unit cost assumptions to reflect a 20% YoY rise for FY23 (from 5-10%).

• The sugar unit’s losses widened in 1Q23, as sales volumes fell 12% YoY and 17% QoQ while raw sugar prices and utilities costs rose. Its utilisation factor (UF) fell to 42% (from 46% in FY22). Going forward, higher raw sugar prices and gas and electricity costs should remain detrimental to earnings, but UF and revenue should improve as its Johor boiler has recommissioned in April, while the Malaysian Government has allowed its subsidiary MSM Malaysia to sell a new variant of refined sugar at floating rates.

• We slash FY23-25F earnings by 25-33% after lowering FFB assumptions, PK prices and sugar earnings and raising unit costs. Given the reversal into losses, we now switch our valuation methodology to EV/ha (from P/E) for the plantation division. Our TP includes a 12% ESG discount.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 31 May 2023