Investment Highlights

• We are upgrading Genting Plantations (GenP) to HOLD from SELL as its share price has fallen below our fair value of RM6.55/share. Our fair value for GenP is based on FY23F PE of 18x and an unchanged 3-star ESG rating.

• GenP’s annualised 1HFY22 core net profit (ex-unrealised forex gains of RM9.6mil) was significantly above our forecast but within consensus estimates.

• The discrepancy between GenP’s results and our forecast was due to higher than expected plantation operating profit margin and downstream earnings. We raise GenP’s FY22E net profit by 42.1% to account for these 2 items.

• GenP only applied 30% of its full year fertiliser requirements in 7MFY22 due to the wet weather. As for downstream, earnings rebounded to RM23.6mil in 2QFY22 from RM3.7mil in 1QFY22 as a shipment of products was delayed to 2QFY22.

• Comparing 1HFY22 against 1HFY21, GenP’s core net profit rose 98.9% to RM330.5mil, underpinned by higher palm product prices and a 3.2x rebound in the share of net profit in associates (mainly premium outlets). The Genting Highlands and Johor Premium Outlets enjoyed increased visitor patronage and spending in 1HFY22 in the absence of Covid-19 lockdowns.

• GenP recorded an average CPO price of RM4,860/tonne in 1HFY22, 56.5% higher than the RM3,105/tonne achieved in 1HFY21. Average palm kernel price rose to RM3,777/tonne in 1HFY22 from RM2,322/tonne in 1HFY21.

• After a weak 1QFY22, GenP’s FFB production rebounded by 12.8% QoQ in 2QFY22. Comparing 1HFY22 against 1HFY21 however, the group’s FFB output growth was 4.5%. We attribute the decline in FFB production to the wet weather in Indonesia and Malaysia in 1QFY22. We believe that Indonesia accounted for 50% to 60% of GenP’s FFB production in 1HFY22.

• Downstream EBITDA (biodiesel and refining) surged by 50.8% YoY to RM27.3mil in 1HFY22 on stronger demand for biodiesel in Malaysia. EBITDA margin of the downstream division inched up to 4.2% in 1HFY22 from 2.7% in 1HFY21.

• GenP’s all-in cost of production increased to RM2,190/tonne in 1HFY22 from RM1,870/tonne in 1HFY21 as labour, transportation and fertiliser costs surged. GenP’s fertiliser costs are expected to double in FY22E as global supply is curbed by economic sanctions on Belarus and Russia.

Source: AmInvest Research - 25 Aug 2022