FGV Results Disappointing

FGV for its full 9-month result was disappointing as YTD realised the average CPO price of RM4,989/MT is set to soften along with seasonally weaker FFB output moving into the fourth quarter. Loss from its sugar division is also likely to continue beyond FY22 into early FY23. Research house Kenanga is cutting its FY23-24F net profit forecasts by 9-14% and reducing its TP by 10% to RM1.40 (from RM1.55)

The group’s core net profit came within 75% and 78% of the full-year forecast and the full-year consensus estimate, however, analysts deem the results below expectation as weaker CPO prices and seasonally lower FFB output are anticipated for 4QFY22. The third quarter net profit of RM257m was dampened by lower plantation pre-tax profit as well as higher sugar division’s pre-tax losses. Plantation pre-tax profit fell to RM431m on a combination of lower but still decent CPO price of RM4,830/MT and higher ex-mill CP cost of RM2,262. Harvesting-wise, FFB output was up seasonally by 12% QoQ but down 4% YoY due to labour shortfall.

Sugar division’s LBT worsened from RM29m a quarter ago to RM71m (versus PBT of RM18m in last year’s third quarter). MSM’s sugar operations were badly hit by a 20% YoY increase in costs, which ranged from the higher cost of raw sugar to higher freight, gas as well as packaging costs. MSM Johor was also running below capacity, with only one boiler operating as the other one is undergoing a major overhaul. Overall, FGV managed to still grow 9MFY22 PBT by 45% YoY but mainly on the strength of the 1HFY22 plantation performance.

Since early June, CPO prices have fallen sharply from the improved supply. However, as demand is expected to recover moving into 2023, CPO prices should still stay relatively firm. Moreover, elevated fossil fuel prices are also propping up demand for biofuels. The economic slowdown may dampen demand but it would have to be a very severe and protracted one as palm oil is an essential product, consumed mostly as food but also as fuel. Kenanga is nudging up FY22F CPO price for FGV from RM4,500 to RM4,800 per MT but lowering its FY23 assumption from RM4,000 to RM3,800 per MT.

In view of the sugar losses, MSM is seeking a higher retail price ceiling from the Malaysian government but approval is likely only in FY23, possibly even after Hari Raya Aidilfitri in April 2023.

On the takeover bid, the controlling shareholder, FELDA, triggered an MO to acquire FGV at RM1.30/share in Jan 2021. Since then, FELDA’s stake in FGV has risen from 51% to 81%. Hence. FGV no longer meets the 25% minimum public shareholding listing requirement. After successfully extending the MO several times, FELDA failed to do so in Aug 2022. As FELDA can easily pare its stake in FGV to meet Bursa’s requirement, it is likely that the original intention of taking FGV private remains intact. The share price has also fallen from a high of RM2.12 to close at RM1.35, so continual market accumulation is one of several possible options.

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