Investment Highlights

• We are downgrading our recommendation on Genting Plantations (GenP) from BUY to SELL with a lower fair value of RM9.00/share. Our fair value is based on a FY19F fully-diluted PE of 27x. We have cut GenP’s FY19F net profit by 20.9% to account for a weaker plantation EBITDA margin and lower CPO price assumption of RM2,300/tonne vs. RM2,500/tonne previously.

• We believe that investors should take profit on GenP. GenP is the top performing plantation stock in our coverage. In spite of the plunge in CPO price, GenP has outperformed the KLCI by 11.1 percentage points on a three-month basis and 7.2 percentage points on a sixmonth basis.

• GenP's 9MFY18 core net profit (ex-disposal and forex changes of RM16.8mil) was below consensus estimates and our expectations. We have reduced GenP’s FY18E net profit by 27.6% to account for a higher effective tax rate of 29% and lower plantation EBITDA margin.

• Like most of the other plantation companies, GenP’s 3QFY18 performance was weak. Core net profit declined by 33.6% QoQ to RM24.4mil in 3QFY18 as EBITDA of the Malaysia plantation unit fell by 26.4% and EBITDA of the Indonesia division contracted by 39.5%. Average CPO price shrank by 10.8% from RM2,291/tonne in 2QFY18 to RM2,043/tonne in 3QFY18. FFB production inched up by 5.4% QoQ to 505,000 tonnes in 3QFY18.

• Comparing 9MFY18 against 9MFY17, GenP’s core net profit slid by 41.9% to RM133.9mil. This was due to a lower CPO price, higher production costs and an increase in effective tax rate. Effective tax rate rose from 27.0% in 9MFY17 to 29.1% in 9MFY18 as certain expenses were not tax deductible.

• Group average CPO price slipped 19.3% from RM2,770/tonne in 9MFY17 to RM2,235/tonne in 9MFY18. FFB production growth was 9.0% YoY in 9MFY18.

• In Indonesia, GenP’s FFB production grew by 43.2% YoY in 9MFY18. The Indonesia unit recorded an EBITDA of RM97.2mil in 9MFY18 vs. RM140.6mil in 9MFY17. Indonesia accounted for 48.0% of group FFB production in 9MFY18.

• In Malaysia, FFB production was flat QoQ in 3QFY18 after falling by 16.0% QoQ in 2QFY18. FFB output in Malaysia shrank by 11% YoY in 9MFY18. EBITDA of the Malaysia unit was RM218.9mil in 9MFY18 against RM289.3mil in 9MFY17.

Source: AmInvest Research - 30 Nov 2018