FGV affected by higher operating costs

TA Research had revised downward FGV’s earnings forecasts by 42.9% for financial year 2023 (FY23) and 41.8% in FY24.

PETALING JAYA: Dragged by higher operating costs, FGV Holdings Bhd’s dismal results for the first quarter of financial year 2023 (1Q23) came in mostly below market consensus, say analysts.

The diversified integrated agri-business group posted a core net loss of RM29.8mil in 1Q23, versus a core net profit of RM406.1mil in 4Q22 and RM427.6mil in 1Q22 respectively.

TA Research revised downward FGV’s earnings forecasts by 42.9% in the financial year 2023 (FY23) and 41.8% in FY24, after factoring in lower-than-expected 1Q23 results, higher production costs and reduced contributions from its joint ventures and associates.

On the outlook, the research house said FGV’s management expects the second half of the year (2H23) to remain challenging.

“Crude palm oil (CPO) prices are expected to remain stable in the near term, ranging between RM3,800 and RM4,000 per tonne,” it added.

FGV’s fresh fruit bunch (FFB) production, however, is expected to grow, given the additional migrant workers and an improved palm age profile.

Its management, however, 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.

TA Research downgraded FGV to “hold” with a revised target price (TP) of RM1.45 a share from RM1.62 previously.

Meanwhile, the research house said there is no indication of Felda’s direction on FGV after the former’s privatisation bid fell through.

“However, we view the possibility of privatisation going through remains high. FGV’s public spread, standing at 13.09% as of May 22, has failed to meet the 25% public spread requirement,” it pointed out.

According to Hong Leong Investment Bank (HLIB) Research, the key culprits to FGV’s earnings shortfall were lower-than-expected FFB output, higher-than-expected CPO production cost and higher-than-expected net finance cost.

The research house has cut FGV’s core net profit forecasts by 43.4% in FY23 and 27.2% in FY24, mainly to account for lower FFB yield and higher CPO production cost assumptions.

Following the switch of valuation methodology and update on valuation parameters arising from the recent release of FGV’s FY22 annual report, HLIB Research has maintained a “hold” on the stock with a lower TP of RM1.28 a share.

Meanwhile, Kenanga Research said FGV’s poor set of 1Q23 results came in at less than 1% each for both its and consensus’ full-year estimates.

“While its average CPO price eased quarter-on-quarter and year-on-year, which was not surprising, the margins were weighed down by high costs, muted FFB production and continual losses from its sugar subsidiary,” it noted.

In 1Q23, MSM Malaysia Holdings Bhd’s sugar business continued to report losses as the cost of buying raw sugar rose along with freight and processing costs while a sizeable portion of its revenue was regulated by retail price caps.

FGV ended 1Q23 with RM5.8bil in net debt or 100% net gearing compared with RM5.9bil a quarter ago.

In light of the weaker-than-expected earnings, Kenanga Research has downgraded FGV’s core net profit by 60% in FY23 and 50% in FY24, respectively.

The research house said: “All in all, we maintain a firm CPO price outlook, just adjusting down FY23-FY24 CPO price slightly from RM3,800 to RM3,700 per tonne to reflect the softness in 1Q23 realised prices.”

MSM is also looking to improve its performance on higher exports after the recent completion of rectification work at its Johor plant, it added.

Kenanga Research has maintained a “market perform” on FGV with a TP of RM1.40 a share.

The risks to its call include weather impact on edible oil and sugar supplies, unfavourable commodity prices fluctuations and production cost inflation.

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