Investment Highlights

• We are maintaining our HOLD recommendation on Genting Plantations (GenP) with a lower fair value of RM10.65/share (vs. RM10.84/share previously). Our fair value for GenP implies a fully diluted FY18F PE of 25x.

• We have reduced GenP's FY17F net profit by 2.5% to account for a higher depreciation expense resulting from the early adoption of FRS116 accounting standard. Under the new accounting standard, depreciation expense is recognised on new mature areas. The negative impact of a 60% increase in depreciation expense is partly offset by the positive impact from our upward revision in average CPO price assumption. We are now assuming an average CPO price of RM2,700/tonne for FY17F vs. RM2,550/tonne previously. We have revised GenP's FY18F net profit downwards by 1.8% to adjust for the higher depreciation expense as well.

• GenP's FFB production is expected to grow by double-digit percentage in FY17F. On a monthly basis however, the group's FFB output may decline by 10% in August 2017 due to lower output in Sabah. Also, we understand that West Malaysia may face a different production pattern in FY17F. The quantum of GenP's FFB production in West Malaysia may be the same in 2HFY17 and 1HFY17. In contrast, the Sabah and Indonesia units may record their peak production in late 3Q or early 4Q, resulting in 2HFY17 accounting for 55% of full-year production.

• Looking ahead to FY18F, GenP expects its Indonesia division to record a FFB production growth of 30% to 40% compared with more than 50% in FY17F. FFB output in Malaysia is expected to be marginally higher or lower by 5% in FY18F. About 2,000ha to 3,000ha of ageing oil palm trees are expected to be replanted in FY18F.

• Production costs (all-in) were RM1,350/tonne in Malaysia and RM1,900/tonne in Indonesia in 1HFY17. In comparison, they were RM1,550/tonne in Malaysia and RM2,400/tonne in Indonesia in 1HFY16.

• GenP's palm refinery recorded a small loss in 1HFY17. The palm refinery, which commands an annual capacity of 600,000 tonnes, is currently operating at an average utilisation rate of 40% vs. 20% previously. Recall that the group had an unrealised profit of RM29mil in 1QFY17 as 18,000 tonnes of CPO were not processed but held as inventory by the palm refinery in Lahad Datu. About RM4mil of the unrealised profits were recognised in 2QFY17.

• Comparing 1HFY17 against 1HFY16, higher CPO price and production boosted GenP's plantation earnings by 105.5%. FFB production surged by 33.9% YoY in 1HFY17 driven by the Indonesia unit, which recorded a 81.0% increase. FFB output in Malaysia rose by a smaller 16.4% YoY in 1HFY17.

Source: AmInvest Research - 24 Aug 2017