For the second quarter of 2023, FGV’s revenue declined to RM4.49b while earnings sank into the red to -RM31.6m as opposed to a profit of RM374 million in the prior year. The deviation was largely driven by the lower operating profit of the plantation segment as well as the ongoing loss-making of the sugar component. Additionally, PAT turned to – RM18.2m exacerbated by the higher effective tax rate of 97.0% (above Malaysia’s 24% rates) due to certain expenses which are not allowable and deferred tax assets not recognised on losses in certain subsidiaries.
The operating profit segment is down to RM13 million versus RM608.5m in 2QFY22, owing to the lower ASP of CPO prices realized at RM4,000/mt, lower CPO sales volume recorded, lower margin achieved from downstream business, where demand for Oleochemical has been reduced substantially.
Operational front, FFB production dropped to 0.78m Mt from 0.96m Mt, in fact, yield also eased to 2.91Mt/Ha. CPO costs of production ex-mill now spiked to RM3,018/Mt on a combination of higher manuring and labour costs. Nonetheless, OER remained stable at 20.84% thanks to the improved number of workers for harvesting activities (banking on 2nd generation Felda settlers).
The sugar segment’s operating loss has now been reduced to only -RM5.4m from -RM19.6m mainly attributed due to better control of its input cost following better procurement has been executed amid improved hedging activities carried away. Nevertheless, our concerns remained regarding the movement of the Ringgit as approximately 75%-80% of input cost exposed to currency volatility.
Earnings forecast. Since 1HFY23 core PATAMI came in only at RM9.2m and reported PATAMI also went down to -RM19.5m in 2QFY23 as opposed to RM743.3m in the prior year. MIDF pared the FY23-FY25F earnings estimates by -76%/-65%/-43% to RM153.5m/RM193.9m/RM42.6, as it says it reckons the production cost to remain elevated driven by unsustainable FFB production growth (due to inexperienced newly hired harvesters and El-Nino impacts, in which will resulting lower OER ahead)
As for the valuation of FY24F, the new TP of RM1.06 (previously RM1.38) is based on PER of 20.0x (its 5-year mean) on FY24F EPS of 5.3sen. The house opines that FGV’s outlook remains unstable, and the share price rally for the past few months is more skewed to technical rally in anticipation of higher contribution coming from MSM subsegment.
Across the downstream subsector, most of its peers have negative margins for Oleochemical and refinery, and FGV
unfortunately in the same boat, compounded by the high cost of production. Potential upside risks are: (i) increased CPO
ASP realized and sales volume; (ii) MSM turns to profit and (iii) declined in cost of production.
