Investment Highlights

• Maintain BUY on Genting Plantations (GenP) with an unchanged fair value of RM11.50/share, which implies an FY18F fully diluted PE of 27x. We continue to like GenP for its cost efficiency, strong FFB production growth and stable recurring income from the premium outlets.

• GenP's valuations are on par with the large-cap plantation companies like IOI Corporation and Kuala Lumpur Kepong. We believe that this is justified due to the young age profile of the group's oil palm trees and large reserves of plantable landbank in Indonesia. Also, GenP's FFB production growth is consistently one of the highest in our stock universe.

• GenP is expected to receive proceeds of RM806mil when its 104mil warrants are converted by 17 June 2019. This would boost the group's cash reserves to more than RM2.3bil. The warrants are in-the-money as the exercise price of RM7.75/share is below GenP's share price of RM9.90.

• Operationally, we have assumed that GenP's FFB production would grow by 17% in FY18F vs. 16.7% achieved in FY17. The group's FFB output growth of 16.7% in FY17 was a tad higher than management's guidance of 15%.

• The expansion in GenP's FFB production in FY18F is expected to be underpinned by an increase in mature areas of 18,000ha. Out of the 18,000ha, the acquisition of oil palm estates from Lee Rubber is expected to account for almost 12,000ha.

• We believe that GenP's production cost (all-in) would decline marginally in FY18F (FY17E: RM1,6000/tonne) as economies of scale from a higher volume of CPO production help offset higher costs of fertiliser and wages.

• Fertiliser is anticipated to be 10% YoY more expensive in 1HFY18 while industry minimum wage is expected to increase by 8.7% to 8.9% YoY in Indonesia in FY18F. A stronger MYR may not have a positive impact on fertiliser cost as fertiliser prices in USD terms have gone up in line with higher petroleum prices. Fertiliser is imported in USD by the trading companies in Malaysia.

• We forecast GenP's share of net profit in the premium outlets to climb by 30% in FY18F on the back of the fullyear impact of Genting Highlands Premium Outlet (GPO). GPO received three million visitors in 2HFY17. This is better than Johor Premium Outlet's (JPO) achievement in its first year of operations. JPO receives about four million visitors per year. GPO opened in June 2017.

Source: AmInvest Research - 12 Feb 2018