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 PE of 29x.

• GenP’s 1HFY19 results were 40% below consensus estimates and 25% short of our expectations. We have reduced GenP’s FY19E net profit forecast by 20.9% to account for a weaker-than-expected plantation EBITDA margin.

• GenP’s core net profit (ex-forex loss of RM3.7mil) fell by 39.6% YoY to RM66.1mil in 1HFY19 dragged mainly by the plunge in palm product prices and higher production cost per tonne.

• Although GenP’s FFB production rose by 10.8% YoY in 1HFY19, this was not enough to mitigate the fall in palm product prices. Average CPO price slid by 16.1% to RM1,960/tonne in 1HFY19 from RM2,336/tonne in 1HFY18.

• Due to the weak palm prices and increased production costs, plantation EBITDA margin declined to 28.8% in 1HFY19 from 40.3% in 1HFY18. GenP’s plantation EBITDA dived by 31.5% YoY to RM171.2mil in 1HFY19.

• GenP’s all-in production cost was RM1,850/tonne in 1HFY19 compared with RM1,800/tonne in 1HFY18. The increase in production cost per tonne in 1HFY19 was mainly due to lower palm kernel credits and higher fertiliser costs.

• GenP’s downstream unit performed well in 1HFY19. EBITDA of the downstream division surged by 592.0% to RM34.6mil in 1HFY19 from RM5.0mil in 1HFY18 on the back of higher sales of biodiesel and refined palm products. GenP has locked in to sell 120,000 tonnes of biodiesel in FY19E vs. 40,000 tonnes in FY18.

• GenP has forecast an FFB output growth of 10% to 15% for FY19E. Group FFB production climbed by 10.8% YoY in 1HFY19. FFB output in Malaysia rose by an estimated 9.1% YoY in 1HFY19 while in Indonesia, FFB production expanded by 12.7%. Indonesia accounted for 46.1% of GenP’s FFB output in 1HFY19.

• GenP’s net gearing stood at 28.0% as at end-June 2019 vs. 41.2% as at end-March. Operating cash flows dropped to RM130.9mil in 1HFY19 from RM186.1mil in 1HFY18 in line with the fall in palm product prices.

Source: AmInvest Research - 29 Aug 2019