• Maintain SELL and SOP-based MYR1.20 TP, 8% downside. 1Q23 earnings were dragged by lower milling margin and higher costs. While prospects should improve in 2H23 on better output and lower costs, FGV Holdings’ short-term outlook remains weak. Valuation remains steep, at 11x FY23F P/E vs peers of 6-8x.

• FGV reversed into a core loss of MYR29.8m in 1Q23, from a core profit of MYR427,6m in 1Q22 and MYR406.3m in 4Q22. This was due to lower milling margin for external fruit, lower PK prices and higher unit costs.

• 4M23 FFB output declined by 7.7% YoY. FGV is now guiding for lower FFB output growth of 5-8% (from 10-15%), expecting productivity to recover strongly in 2H. It expects 1H:2H production to be in the 42-46%:54-48% range. At end-1Q23, its labour shortage was at 11% and this is expected to only be fully resolved by year-end. We maintain our FY23F FFB growth at 5-6%.

• Some forward sales done. FGV has sold 20-30% of its own production forward at MYR4,000/tonne. Note that its own production makes up about one-third of total processed volume.

• Unit costs to moderate in 2H23. In 1Q23, unit costs rose 45% YoY in 1Q23 to MYR2,944/tonne, as fertiliser costs rose 34% YoY while labour costs also rose due to higher minimum wage. As fertiliser costs should remain high in 2Q (due to timing of tender), costs are only expected to moderate in 2H23. As such, management is now guiding for higher unit costs of MYR2,400-2,500/tonne in FY23 (from the original guidance of MYR2,200-2,300)

• Weak milling margin dragged profitability. In 1Q23, FGV acquired 2.17m tonnes (+9% YoY) of external and settlers’ FFB, making up 73% of total FFB processed. Its milling profit for external FFB fell 92% YoY to MYR7m due to higher raw material costs and lower OER. OER fell to 19.8% in 1Q23 (from 20.3% in 1Q22). Going forward, we think milling margin could remain weak in 2Q due to larger CPO price fluctuations, although this could be slightly offset by improving OER. FGV expects milling margin to improve more significantly in 2H23, on the back of lower unit costs. We have reduced our milling margin forecasts accordingly.

• Remediation ongoing. In FY22, FGV provided MYR112m for compensation of recruitment fees to its workers. This will be charged out in three tranches – the first of which (MYR30m) has already been done in March. The remaining two tranches will be charged out in June and September. The company is unable to hire any new labourers until its independent auditor, Elevate Ltd has completed the verification process of its recruitment processes and remediation fees. FGV intends to submit its audit report to the US Customs and Border Protection sometime in 3Q23.

• Maintain SELL and MYR1.20 TP, which includes a 12% ESG discount. We trim FY23F earnings by 12% but keep FY24F-25F earnings, after lowering milling margins.

Source: RHB Research - 1 Jun 2023