Investment Highlights

• We maintain SELL on Genting Plantations (GenP) with an unchanged fair value of RM7.19/share. Our fair value for GenP is based on an FY21F PE of 20x.

• At first glance, GenP’s 1QFY20 core net profit of RM81.2mil (ex-forex gain of RM10.1mil) appears to be within our forecast and above consensus estimates. Included in GenP’s 1QFY20 reported net profit were a net gain of RM7.0mil on a disposal of land to the government and a positive minority interest charge of RM20.6mil. Effective tax rate was also lower at 22.1% in 1QFY20 vs. 29.8% in 1QFY19.

• Hence, we believe that the YoY rise of 72.0% in GenP’s core net profit in 1QFY20 would not be repeated in the following quarters as CPO prices have declined. In addition, the premium outlets at Resorts World Genting and Johor were closed for almost two months.

• GenP’s average CPO price realised was RM2,619/tonne in 1QFY20 in contrast to the spot CPO prices of RM1,900/tonne to RM2,200/tonne currently. GenP’s share of net profit in the premium outlets was RM47.6mil in FY19 or 26% of pre-tax profit.

• We have trimmed GenP’s FY20F net profit by 11.0% to account for weaker plantation EBITDA margin and earnings from the premium outlets. Also, we are now assuming that GenP’s FFB output would improve by 4.5% in FY20F against our original forecast of 10%. GenP’s FFB output fell by 19.0% YoY in 1QFY20 due to the lagged impact of the drought and haze, which took place in Indonesia and Malaysia in 3QFY19.

• Minority interest was a positive RM20.6mil in 1QFY20 (vs. negative RM0.4mil in 1QFY19) as GenP’s Indonesian subsidiaries were in the red. This was due to forex losses arising from the depreciation of the IDR against the USD.

• On the EBITDA level, GenP’s earnings grew by only 9.2% YoY to RM144.9mil in 1QFY20. The 10.7% YoY improvement in upstream earnings in 1QFY20 was offset by a 35.9% drop in downstream profits. Export sales volume of refined palm oil were affected by lower demand from India and China in 1QFY20.

• Average CPO price realised was RM2,619/tonne in 1QFY20 vs. RM1,974/tonne in 1QFY19. Interest expense shrank by 18.9% YoY to RM21.4mil in 1QFY20.

• Net gearing was 35.0% as at end-March 2020 compared with 33.5% as at end-December 2019. GenP’s operating cash flows amounted to RM124.9mil in 1QFY20 vs. RM128.7mil in 1QFY19.

Source: AmInvest Research - 21 May 2020