• Maintain NEUTRAL, new MYR1.58 TP from MYR1.50, 8% upside. FGV Holdings’ FY23 results are lower than expected, at 83% of consensus. We expect earnings to improve further in 2024 as unit costs decline and as the sugar division remains in the black. However, valuations are lofty – the stock is trading at a steep 26.8x FY24F P/E vs the peer range of 8-12x.

• FY24 results disappointed, at 83% of the consensus forecast – mainly on lower-than-expected FFB output, higher-than-expected unit costs and losses incurred at its fertiliser sub-segment. Core net profit almost tripled QoQ in 4Q23 to MYR92.3m, bringing FY23 core net profit to MYR93m.

• FGV recorded a DPS of 3 sen (FY22: 15sen) for FY23. This translates to a core net dividend payout of >100%, and net yield of c.2%.

• 4Q23 FFB output declined by 7.5% YoY, bringing FY23 output growth to -8.8% YoY. This is below FGV’s FY23 guidance of a 6% decline YoY. For FY24, management expects production to start decelerating in 1Q24, as it would be affected by dry weather in West Malaysia – however, production should pick up in the later part of the year. As such, it is targeting FFB growth of 10- 15% YoY for the year. In Jan 2024, FFB growth declined 10.6% YoY. To be conservative, we project FY24-25F FFB growth at 4-6% YoY.

• FGV booked a 4Q23 ASP of MYR3,789/tonne (-2% QoQ, -15% YoY), bringing its FY23 ASP to MYR3,901/tonne. The company has sold about 20% of its forward 3-4 months’ output at an average of MYR4,000/tonne. We make no change to our MYR3,900/tonne average price assumption for FY24.

• Unit costs fell 10% QoQ but rose 13% YoY to MYR2,490/tonne in 4Q23. This brought FY23 unit cost to MYR2,761/tonne (+26.5% YoY) – on recruitment costs for new workers, a higher minimum wage and steeper fertiliser costs due to the utilisation of the remaining higher-priced fertiliser from 2022. FGV paid c.MYR72m in compensation for recruitment fees to approximately 20,000 workers in 2023. For FY24, it expects unit costs to decline 15-20% YoY to MYR2,200-2,300/tonne, on the back of lower fertiliser prices and the absence of recruitment costs. We impute a similar 10-15% YoY reduction in our unit cost assumptions for FY24.

• The sugar unit turned around to profitability in 4Q23, helped by MYR48m in government incentives received during the quarter. In addition, sales volumes rose 7% QoQ and 11% YoY, while ASP increased 10% QoQ and 27% YoY. Going forward, with the continuation of the MYR1/kg incentive from the Government until further notice, the sugar division should receive MYR24m per month and remain in the black. We have adjusted our forecasts accordingly.

• We lift our SOP-based TP to MYR1.58 from MYR1.50. We slash FY24-25F earnings by 46-58% after adjusting for FY23 results, sugar division earnings and raising unit costs. However, after updating our SOP valuation, our TP increases to MYR1.58, which also includes a 12% ESG discount.

Source: RHB Research - 27 Feb 2024