Weakness in upstream profit to impact FGV

Most analysts have lowered their FY24 to FY26 earnings forecasts on the integrated agri-business group.

PETALING JAYA: FGV Holdings Bhd’s disappointing first quarter of the financial year 2024 (1Q24) results have prompted most analysts to lower their FY24 to FY26 earnings forecasts on the integrated agri-business group.

The group’s earnings compression continues with its 1Q24 core profit after tax and minority interests (Patami) reporting merely RM6mil, falling 88.6% quarter-on-quarter (q-o-q) and losing over 100% year-on-year (y-o-y), dragged by the weakness in upstream operating profit.

MIDF Research in a report said: “The earnings came in below our and the consensus estimate, accounting for only about 3.2% and 2.3% of full-year estimates.

“We revised our earnings lower for FY24, FY25 and FY26 by 47%, 32% and 6% y-o-y respectively.”

The major adjustment was made if cost of production stayed above RM2,500 per tonne, with fresh fruit bunch (FFB) output anticipated to grow only 1% and oil extraction rate remaining below 15%, added the research house.

For these reasons, MIDF Research has maintained a “sell” on the stock with a revised target price (TP) of RM1.14.

Similarly, TA Research has adjusted downward FGV’s earnings forecasts for FY24 and FY25 by 37.2% and 25.3% respectively, following the lower-than-expected 1Q24 results and decreased contributions from the plantation division.

Additionally, the brokerage firm has introduced its FY26 earnings forecast of RM2mil, down 2.9% y-o-y.

Some of the key highlights at a recent briefing with FGV, TA Research said the management expects the crude palm oil prices would remain within the range between RM3,800 and RM4,000 per tonne for FY24.

Other highlights include that the FFB production guidance for FY24 remains unchanged, with an expected growth rate of 10% to 15%, supported by improved yield and the ease of labour shortages.

Currently, FGV faces labour shortage of 10% or 3,000 workers, in relation to the total estate workforce requirements.

“However, FGV management anticipates that the labour shortage issue would be alleviated as it is actively seeking to recruit more workers from Indonesia,” TA Research noted.

The group also intends to submit a petition to the United States Customs and Border Protection in June, seeking to modify the Withhold Release Order (WRO).

It added that the management anticipates that the process of lifting the WRO will span approximately nine to 12 months.

Meanwhile, the group has allocated RM605mil over three years to upgrade and construct new housing for migrant workers.

TA Research has also downgraded FGV to a “sell” from a hold with a revised TP of RM1.34 from RM1.50 previously.

“We do not see any re-rating catalysts in the near term for the stock,” it added.

For Hong Leong Investment Bank (HLIB) Research, it was a disappointing start for FGV as the group’s 1Q missed expectations, accounting for only 0.8%-1.9% of consensus and its full-year estimates, due mainly to lower-than-expected FFB output.

Hence, the research house has cut its FY24 core net profit forecast by 18.1%, mainly to account for lower FFB output assumption.

“The group’s FY25 and FY26 net profit forecasts, on the other hand, remain largely intact,” added HLIB Research.

Post-update of valuation parameters following release of FGV’s latest annual report, the research house has maintained a “hold” rating on FGV with a lower sum-of-parts TP of RM1.44.

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