• D/G to SELL from Neutral, new MYR1.20 TP from MYR1.58, 11% downside. 1Q24 disappointed, as FGV Holding’s plantation unit reversed into losses. Although we expect earnings to pick up, given the improving FFB output and a profitable sugar division buoyed by government incentives, valuations are lofty – the stock is trading at a steep 50x FY24F P/E vs peer range of 20-25x.

• 1Q24 results disappointed, at just 0.8-1.3% of our and consensus forecast – mainly on lower-than-expected FFB output (-10% YoY vs our +6% FY24F forecast) and higher-than-expected unit costs which resulted in losses at the plantation division. Associate earnings also disappointed (-87% QoQ, -58% YoY) due to weakness at its overseas downstream units. Core net profit shrank to just MYR2.5m in 1Q24 (from MYR92m in 4Q23).

• 1Q24 FFB output declined 10% YoY (-30% QoQ) from wet weather and the continued labour shortage of 20% in Sabah and 50% in Sarawak. This is below FGV’s FY24F guidance of +10-15% growth YoY and our +4-6% assumption. In YTD-Apr 2024, FFB growth improved to -2.4% YoY. FGV continues to guide for 10-15% growth for FY24, as weather has normalised and it is expecting two mini peaks in 2Q and 4Q this year. In addition, it expects to resolve its labour shortage by end-4Q24. We trim our FY24F FFB growth to 3.7% (from 6%), but keep our 4-5% growth for FY25-26F

• FGV booked 1Q24 ASP of MYR3,907/tonne (+3% QoQ, -2% YoY). It has sold >20% of its West Malaysia output six months ahead, at cMYR4,000/tonne. Our FY24F price remains at MYR3,900/tonne.

• Unit costs down 1% YoY but rose 16% QoQ to MYR2,879/tonne in 1Q24. Given the wet weather in 1Q24, it only applied 14% of its fertiliser requirements for FY24F, but expects to be able to catch up in the coming quarters. Despite lower fertiliser tender prices (-15-20% YoY), FGV has raised its unit cost guidance to MYR2,300-2,400/tonne (-10-15% YoY), from MYR2,200-2,300/tonne, on the back of higher manuring activities in the coming quarters. In 1Q24, it has paid MYR2.9m in reimbursement costs for former workers but has provided for an additional MYR37m for the rest of its reimbursement exercise. We raise our unit costs accordingly.

• The sugar unit remained profitable in 1Q24, helped by MYR72m in government incentives received. Sales volumes rose 21% YoY but fell 7% QoQ, while ASP increased 25% YoY and 2% QoQ. Going forward, with the continuation of the MYR1/kg incentive from the Government until further notice, this division should receive MYR24m/ month and remain in the black.

• We slash FY24F-25F earnings by 25-51% after lowering FFB output, raising unit costs and lowering associate earnings. Our TP has incorporated a higher EV/ha discount of 85% (from 80%) and 12% ESG discount. Valuations are lofty at 50x vs the peer range of 20-25x for 2024F.

Source: RHB Research - 29 May 2024