Investment Highlights

• Maintain BUY on Genting Plantations (GenP) with an unchanged fair value of RM11.20/share. Our fair value for GenP is based on a fully diluted FY19F PE of 27x.

• We have revised GenP’s FY18E net profit downwards by 3.4% to account for a weaker FFB production growth. We have reduced GenP’s FFB production growth from 14% to 11% for FY18E. The group’s FFB output growth was 9% in 9MFY18.

• GenP’s FFB production in Malaysia and Indonesia was below expectations in 3QFY18. This was due to the lagged impact of the dry weather in Indonesia, which took place two years ago and lagged impact of the wet weather in Malaysia, which took place early this year.

• GenP is hopeful that its FFB production would be robust in 4QFY18. Last year, the group achieved its highest level of FFB production in the fourth quarter. The 4Q accounted for 28.4% of group FFB output in FY17. Last year, the highest monthly FFB production was recorded in November.

• GenP has not experienced a situation of palm refiners facing a shortage of barges and storage space in Indonesia yet. We believe that the issue of insufficient barges is more prevalent in East Kalimantan compared with other areas. GenP’s estate operations are primarily in Central and West Kalimantan.

• We understand that the shortage of barges in Kalimantan started after the Hari Raya festivities. The situation worsened after palm production surged in certain areas in Kalimantan. As a result, the price discount between CPO in Malaysia and Indonesia widened from the usual 10% to 20% two to three months ago.

• GenP has begun exporting some of its CPO in Indonesia as export prices have become more attractive than the local price of CPO in the country. Some of the CPO are sold to GenP’s palm refinery in Lahad Datu, Sabah.

• In terms of CPO price outlook, we understand that there are two factors, which will provide a floor to CPO price. First, the cost of CPO production and second, the price of gasoil. As long as CPO is cheaper than gasoil, biodiesel demand will be there to support CPO price. We estimate the price difference between CPO and gasoil to be US$212/tonne currently. In contrast, a year ago, CPO was more expensive than gasoil by US$108/tonne.

Source: AmInvest Research - 7 Nov 2018