Review

• FGV’s 2QFY23 results came in below expectations. The deviation was mainly due to lower-than-expected FFB production and higher operating costs. Excluding the impact of fair value change in relation to the Land Lease Agreement (LLA), forex and other non-core items, the group registered a core net loss of RM26.6mn compared to a profit of RM303.2mn recorded a year ago.

• Cumulatively, 1HFY23 showed a core net loss of RM112.0mn on the back of 31.6% YoY decline in revenue.

• Plantation: 1HFY23 FFB fell 10.6% YoY on the back of an 8.7% drop in FFB yield. The realised CPO and PK prices plunged 22.7% and 50.6% to RM3,995/tonne and RM1,994/tonne, respectively. The average production cost (ex-mill) increased by 40.5% YoY to RM2,986/tonne in 1HFY23. As a result, this segment reported a 93.4% decrease in PBT to RM75.7mn. The weaker results were further compounded by margin compression in the downstream and fertiliser businesses as well as lower JV’s earnings.

• Sugar: Given higher ASP, LBT narrowed to RM45.5mn in 1HFY23 compared to RM59.7mn last year. Besides, the improvement was also attributable to lower freight costs.

• Logistics and Others: This division reported a higher PBT of RM60.9mn (+69.3% YoY), driven by higher handling rates.

• No dividend was declared for the quarter under review.

Impact

• FY23 to FY25 earnings forecasts are revised downward by 1.6% - 45.8% after factoring in lower-than-expected 1Q results, lower FFB production, higher production costs and lower contributions from JVs.

Outlook

• The CPO prices are expected to stay in between RM3,800 and RM4,000 per tonne.

• FFB production is expected to grow with additional migrant workers and an improved palm age profile.

• However, management also remained cautious of adverse weather conditions that could impact palm oil production, such as the El Nino weather pattern towards the end of the year.

Valuation

• We maintain SELL on FGV with an unchanged target price of RM1.45/share, based on 0.8x CY24 P/BV.
• There is no indication of FELDA's direction on FGV after the privatisation bid fell through. FGV’s public spread standing at 13.09% as of Aug 22, failed to meet the 25% public spread requirement.

Source: TA Research - 29 Aug 2023