Investment Highlights

• Genting Plantations (GenP) is expected to be affected by the downturn in CPO prices. As such, we are keeping our SELL recommendation on GenP with an unchanged fair value of RM9.00/share. Our fair value is based on a FY20F PE of 29x.

• Although GenP has premium outlets and downstream operations, these are not large enough to offset the fall in plantation earnings yet. GenP’s share of profits in the premium outlets is anticipated to make up 17.8% of FY19E’s pre-tax profit. Plantation is expected to account for 81.9% of its EBITDA in FY19E while the downstream unit is envisaged to account for another 14.8%.

• We forecast GenP’s 50% share of the net profit in the Genting and Johor Premium Outlets to rise by 20.0% to RM48.9mil in FY19E partly underpinned by the opening of new brands. In the Johor Premium Outlet (JPO), Bottega Venetta opened in June 2019 while Prada is expected to open in July.

• GenP is flushed with cash due to the RM587.5mil proceeds from the conversion of the group’s 75.8mil warrants this year. The warrants, which had an exercise price of RM7.75/share, expired on 17 June 2019. We estimate GenP’s gross cash reserves to be more than RM1.2bil currently.

• We believe that GenP would use part of its cash reserves to repay borrowings. We do not think that there would be a jump in dividends. GenP’s gross borrowings stood at RM2.76bil as at end-March 2019. Out of these, about 55% were denominated in USD.

• We have assumed that GenP’s FFB production would improve by 12% in FY19E (1HFY19: 10.8%) compared with 10.6% in FY18.

• We think that GenP’s Indonesia unit would record an FFB output growth of 14% to 15% in FY19E while in Malaysia, FFB production is envisaged to be 10% to 11% higher. Indonesia is estimated to make up 45% to 50% of GenP’s FFB output in FY19E. Malaysia is anticipated to account for the balance 50% to 55%.

• We reckon that GenP’s all-in group production cost would rise to RM1,750/tonne in FY19E from RM1,700/tonne in FY18. The increase in production cost per tonne in FY19E is due to higher fertiliser and transportation costs and lower palm kernel credits. According to the MPOB, average monthly price of palm kernel (ex-mill) has fallen by 24.8% to RM1,093/tonne in June from RM1,453/tonne in January 2019.

Source: AmInvest Research - 24 Jul 2019