Investment Highlights

• We maintain 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 FY20F fully diluted PE of 27x. We have reduced GenP’s FY20F net profit by 10.4% to account for a lower CPO price assumption of RM2,200/tonne vs. RM2,350/tonne previously.

• For FY19F, we have cut GenP’s net profit by 29.3%. We have reduced the group’s property earnings, EBITDA margin for the plantation unit and average CPO price assumption to RM2,100/tonne from RM2,300/tonne for FY19F.

• GenP’s 1QFY19 core net profit (ex-forex loss of RM5.5mil) of RM47.2mil was 28% below our expectations and consensus estimates. GenP’s core net profit declined by 35.2% to RM47.2mil in 1QFY19 from RM72.8mil in 1QFY18 due to the plunge in palm product prices and fall in plantation EBITDA margin. As a result, plantation EBITDA contracted by 29.9% YoY to RM107.0mil in 1QFY19.

• The fall in CPO price could not be compensated by the 14% YoY increase in GenP’s FFB production in 1QFY19. GenP’s average CPO price shrank by 16.9% to RM1,974/tonne in 1QFY19 from RM2,375/tonne in 1QFY18.

• GenP forecasts a FFB output growth of 10% to 15% for FY19F. Group FFB production climbed by 14% YoY in 1QFY19. FFB output in Malaysia improved by 5.9% YoY in 1QFY19 while in Indonesia, FFB production increased by 25.7%. Indonesia accounted for 45.1% of GenP’s FFB output in 1QFY19.

• GenP recorded an all-in production cost of RM1,800/tonne in 1QFY19 compared with RM1,600/tonne in 1QFY18. The YoY increase in the production cost in 1QFY19 was mainly due to a fall in palm kernel credits. This caused a RM160/tonne increase in GenP’s cost of production in 1QFY19.

• On a positive note, GenP’s downstream unit performed well in 1QFY19 underpinned by higher sales of biodiesel and improved utilisation rate at the palm refinery in Lahad Datu, Sabah. EBITDA of the downstream division surged to RM22mil in 1QFY19 from RM0.4mil in 1QFY18. Utilisation rate of the palm refinery rose to 70% in 1QFY19 from 30% to 40% in 1QFY18.

• GenP’s net gearing inched down to 41.2% as at end-March 2019 from 44.6% as at end-Dec 2018. Operating cash flows were lower at RM128.7mil in 1QFY19 compared with RM155.8mil in 1QFY18 due to weaker palm product prices.

Source: AmInvest Research - 24 May 2019