Investment Highlights

• We are upgrading Genting Plantations (GenP) from HOLD to BUY with a higher fair value of RM11.50/share (vs. RM10.65/share previously). GenP's share price has dropped by 10% from the peak of RM11.579/share on 30 March 2017. We believe that the fall in GenP's share price has already reflected the negative earnings impact of the FRS116 accounting standard and the unexciting performance of the palm refinery in Lahad Datu.

• Our fair value for GenP is based on an FY18F PE of 27x vs. 25x originally. GenP's PE assumption is at a premium compared with its large-cap peers of 25x as the group has young oil palm trees in Indonesia and its production cost per tonne is the lowest among the companies under our coverage.

• There are mixed signals on GenP's FFB production in 2HFY17. We understand that FFB output in Sabah may not be as robust as expected in 2HFY17 due to lagged impact of the dry weather, which took place in 2015.

• GenP is currently carrying out bunch census on its oil palm trees in Sabah to get an idea on the outlook for the rest of FY17F. GenP's unexciting production in Sabah is expected to be compensated by stronger performance in Peninsular Malaysia. In Indonesia, the YoY growth in FFB output in 2HFY17 may taper off due to the high yields recorded in 2HFY16.

• On the back of these developments, we have assumed that GenP's FFB production would climb by 18% in FY17F vs. 29.9% in 8MFY17.

• In FY18F, GenP's FFB production growth of 10.5% is expected to be driven by its Indonesian unit. FFB output in Indonesia is anticipated to grow by 30% in FY18F mainly on the back of a 5,000ha increase in mature areas. We have not included the additional mature areas of 11,555ha from the proposed acquisition of oil palm estates in South Kalimantan from Lee Rubber in our earnings forecast.

• Including these, we believe that GenP's FFB output would expand by more than 15% in FY18F. The proposed acquisition is expected to be completed in 4QFY17.

• In Malaysia, FFB production is envisaged to be flat or only marginally higher in FY18F as some areas are expected to be taken out for replanting.

• New plantings of oil palm in Indonesia are estimated to be less than 1,000ha in FY17F compared with 2,300ha in FY16. The decline in new plantings in FY17F is due to RSPO's (Roundtable for Sustainable Palm Oil) slow approval process. There are only two auditors in the RSPO currently vs. four previously. Cost of new plantings is about RM15,000/ha.

Source: AmInvest Research - 9 Oct 2017