FGV Holdings - Hit by Sugar Losses and High Tax Rate

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Investment Highlights

  • We maintain HOLD on FGV Holdings with a higher fair value of RM1.45/share vs. RM1.35/share previously. We have raised FGV’s FY24F net profit by 8% to account for a stronger average CPO price assumption of RM4,000/tonne compared to RM3,500/tonne originally.
  • Our revised fair value is based on FY24F PE of 18x, which is the 5-year average for big-cap planters. We ascribe a neutral 3-star ESG rating to FGV.
  • FGV’s results fell short of expectations. The group reported a core net loss (ex-land lease changes) of RM110.4mil in 9MFY23. In contrast, we had forecasted a net profit of RM35.8mil for the full year while consensus had anticipated net earnings of RM236.9mil.
  • FGV under-performed due to a high effective tax rate and larger-than-expected losses at MSM Malaysia. MSM was hit by higher costs of raw sugar, gas and transportation in 9MFY23. We are now forecasting a core net loss of RM49.7mil for FGV in FY23E.
  • FGV swung into a core net loss of RM110.4mil in 9MFY23 from a core net profit of RM785mil in 9MFY22 dragged by losses in MSM Malaysia and lower FFB production and palm product prices. FGV also recognised an impairment of RM44.7mil for its Indonesian assets in 9MFY23.
  • Average CPO price slid by 21% to RM3,948/tonne in 9MFY23 from RM4,989/tonne in 9MFY22. FFB production fell by 9% YoY in 9MFY23. As a result, plantation pre-tax profit margin shrank to 1.1% in 9MFY23 from 6.3% in 9MFY22.
  • On a brighter note, pre-tax earnings of the logistics and others division rose by 38% YoY to RM102.6mil in 9MFY23 on the back of higher handling charges and absence of impairment losses on receivables. Pre-tax profit margin of the division widened to 17.4% in 9MFY23 from 13.8% in 9MFY22.
  • FGV’s issuance of IRPS (Islamic redeemable preference shares) is expected to be completed in 1QFY24. This would help resolve FGV’s public shareholding spread, which stands at 13.1% currently. Recall that FGV has proposed to issue IRPS on the basis of 1 IRPS for every 10 FGV shares held.
  • FGV is presently trading at a fair FY24F PE of 17x, which is higher than the 2-year average of 13x but near the valuations of big cap planters.

Source: AmInvest Research - 30 Nov 2023

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