Investment Highlights

• We are maintaining our SELL recommendation on Genting Plantations (GenP) with an unchanged fair value of RM9.00/share. Our fair value for GenP is based on an FY19F fully diluted PE of 27x.

• GenP’s FY18 core net profit (ex-disposal and forex gains of RM13.4mil) was 8.3% below our forecast and 25% below consensus estimates. GenP’s core net profit slid by 27.4% QoQ to RM17.7mil in 4QFY18 from RM24.4mil in 3QFY18 dragged by a slew of factors.

• First, the group held back sales of CPO in 4QFY18 due to the plunge in CPO price. This resulted in unrealised profits of RM30mil. Some of the unrealised profits will be realised in 1QFY19 as GenP sells the inventory at better prices.

• Second, GenP carried out a voluntary separation scheme (VSS), which cost about RM6mil in 4QFY18. About 300 to 400 people left GenP’s workforce. Cost savings from the VSS are estimated to be RM14mil. Third, an increase in mature areas in 4QFY18 resulted in a 13.5% climb in interest expense and 13.9% rise in depreciation and amortisation expenses.

• All these erased the positive impact of a 21.4% QoQ surge in GenP’s FFB production in 4QFY18. Average CPO price realised was RM1,848/tonne in 4QFY18, which was 9.5% lower than the average price of RM2,043/tonne in 3QFY18.

• GenP’s core net profit (ex-disposal and forex gains of RM13.4mil) fell by 54.3% to RM151.5mil in FY18 dragged by the plunge in CPO price and a higher effective tax rate. These could not be compensated by GenP’s FFB production growth of 10.6% in FY18. GenP expects its FFB production growth to be 10% to 15% in FY19F.

• Group average CPO price slipped by 22.0% to RM2,117/tonne in FY18 from RM2,715/tonne in FY17. Effective tax rate increased to 29.3% in FY18 from 25.2% in FY17 as certain expenses were not tax-deductible.

• GenP’s plantation EBITDA tumbled by 32.6% to RM389.9mil in FY18 from RM578.2mil in FY17. On a positive note, property EBITDA climbed by 54% to RM36.2mil in FY18 from RM23.5mil in FY17 on the back of improved margins and launches of higher value properties.

• Indonesia accounted for 46.1% of GenP’s FFB production in FY18. The Indonesia plantation unit recorded a strong FFB output growth of 44.4% in FY18 while in Malaysia, FFB production slid by 8.4%. GenP recorded all-in production costs of RM1,700/tonne in FY18 vs. RM1,600/tonne in FY17. GenP expects its production cost to be RM1,500/tonne to RM1,600/tonne in FY19F vs. RM1,700/tonne in FY18.

Source: AmInvest Research - 27 Feb 2019