The Star Online (10/06/2021) - PETALING JAYA: The future profitability of FGV Holdings Bhd’s milling division will hinge on the spot crude palm oil (CPO) price premium against CPO future prices, as well as the oil extraction rate (OER) of its mills.

This was deduced by CGS-CIMB Research after an update with the FGV management on the reason behind the planter’s lower earnings from its milling operation, particularly on the processing of external fresh fruit bunches (FFB).

FGV’s milling division posted a loss of RM65mil in the first quarter ended March 31, 2021 (Q121) from processing external FFB (excluding hedging and inventory gains).

But if these items were included, FGV indicated that its milling division had posted a pretax profit of RM10mil in Q121 versus a pre-tax profit RM70mil in Q120.

CGS-CIMB Research in its latest report noted that FGV’s lower earnings was from processing external fruits, which forms 70% of total FFB processed due to high CPO spot prices and lower OER rate.

FGV is also probably the largest third party palm oil miller in the country.

“Only 30% of the total FFB crops that the group processes at its 67 mills are from its own or leased estates.

“The remaining 70% are sourced from Felda settlers (30%) and other outgrowers or suppliers (40%).

“This is significantly higher compared with other larger listed planters who sourced 5%-34% of their FFB processed from external parties, ” said CGS-CIMB Research.

The other key difference lies in the pricing of FFB for third-party fruits.

“The FFB pricing for Felda settlers is based on the Malaysian Palm Oil Board reference price for FFB in the locality unlike the FFB pricing for non-Felda settlers which is based on agreed OER rate.

“On top of this, FGV mills must take in Felda settler’s FFB at all times due to its social obligations to purchase all Felda settlers’ crops, unlike the private millers, ” explained the research house.

The FGV group also revealed that the lower milling profit was partly due to some of its mills registering negative milling margins.

This is due to the lower OER rate achieved at some of its mills against the OER rate used in supplier’s payout.

Hence, CGS-CIMB Research is maintaining a “Hold” rating on FGV with a target price of RM1.30 per share, which is the previous mandatory takeover offer price from major shareholder, Federal Land Development Authority.

Meanwhile, Maybank IB Research in its Q121 round up report on local plantations said Sarawak Oil Palms Bhd (SOP), Boustead Plantations Bhd and Ta Ann Holdings Bhd were the prime beneficiaries which have the least forward sales as shown in their high CPO average selling prices (ASP) achieved in Q121.

“They are poised to benefit from an even better CPO ASP thus far in Q221, in addition to better quarter-on-quarter output.

“Compared with Q220’s CPO ASP of RM2, 281 per tonne, local pure upstream planters will continue to show strong year-on-year earnings per share growth compared to integrated planters and those with higher exposure in Indonesia, ” the research house added.

Maybank IB, which is positive on the sector, said its top buys include Kuala Lumpur Kepong Bhd, SOP and Boustead Plantations. The upstream players with the least forward sales outperformed core profit after tax and minority interests of 67% of the stocks under coverage exceeded its expectations, it added.

Read more at https://www.thestar.com.my/business/business-news/2021/06/10/mills-crucial-for-future-profits