Investment Highlights

• We are keeping our SELL recommendation on Genting Plantations (GenP) with a higher fair value of RM10.08/share vs. RM9.00/share previously. GenP’s fair value is based on an unchanged PE of 29x on FY20F EPS.

• We have revised GenP’s FY20F net profit upwards by 12% to account for a higher average CPO price assumption of RM2,300/tonne vs. RM2,200/tonne previously. However for FY19E, we have reduced GenP’s net profit by 6.6% to account for a weaker-than-expected plantation EBITDA margin.

• We believe that GenP’s 9MFY19 results were 8% below consensus estimates and 6% below our expectations. Comparing 3QFY19 against 2QFY19, GenP’s plantation EBITDA shrank by 14.2% in spite of a 17.4% increase in turnover.

• This was due to a delay in the sale of some CPO products and higher manuring and fertiliser costs in 3QFY19. GenP’s FFB output rose by 5.8% QoQ in 3QFY19. Average CPO price inched up by 1.3% QoQ to RM1,968/tonne in 3QFY19.

• GenP’s core net profit (ex-forex loss of RM3.7mil) declined by 37.2% YoY to RM84.1mil in 9MFY19 largely due to the fall in palm product prices and an increase in production cost per tonne. GenP’s plantation EBITDA contracted by 28.4% YoY to RM226.3mil in 9MFY19. Average CPO price dived by 12.2% to RM1,963/tonne from RM2,235/tonne in 9MFY18.

• All-in production cost rose to RM1,880/tonne in 9MFY19 from RM1,700/tonne in 9MFY18 brought about by higher fertiliser costs and lower palm kernel credits. On a positive note, GenP achieved an FFB production growth of 9.8% YoY in 9MFY19.

• GenP’s downstream unit achieved a higher EBITDA of RM44.6mil in 9MFY19 vs. RM8.4mil in 9MFY18 on increased sales of biodiesel and refined palm products. EBITDA margin of the downstream was 4.4% in 9MFY19 compared with 1.2% in 9MFY18.

• GenP expects its FFB to grow by mid- to high single-digit percentage in FY19E vs. its previous guidance of 10% to 15%. The group’s FFB production in 4QFY19 is expected to be higher than 3QFY19 but flat compared with 4QFY18.

• GenP also believes that CPO prices will remain firm until the end of the year due to weak industry production. However as CPO output rebounds in 1QFY20, CPO prices may soften.

Source: AmInvest Research - 28 Nov 2019