Investment Highlights

• We are keeping our HOLD recommendation on Genting Plantations (GenP) with an unchanged fair value of RM10.75/share. Our fair value implies an FY19F fully diluted PE of 25x.

• GenP's 1QFY18 core net profit (ex-disposal and forex gains of RM28.2mil) was below consensus estimates and our expectations. In spite of this, we are keeping GenP’s FY18F net profit forecast for now in anticipation of improved downstream earnings and FFB production in 2HFY18. Included in GenP’s 1QFY18 net profit were a gain of RM14.4mil on the disposal of land to the government and a forex gain of RM13.8mil.

• Considering the recent set of plantation results, which saw declines in earnings, it is commendable that GenP’s plantation EBITDA rose by 4.5% YoY in 1QFY18. The growth in plantation EBITDA was driven by the Malaysia unit, which recorded a 38% YoY expansion in 1QFY18. The Malaysia division was supported by RM25mil earnings from the sale of unsold CPO inventory previously held by the downstream unit.

• The Indonesia unit registered a smaller EBITDA of RM32.5mil in 1QFY18 vs. RM59mil in 1QFY17 on the back of lower CPO prices.

• Group average CPO price realised fell by 22.2% from RM3,053/tonne in 1QFY17 to RM2,375/tonne in 1QFY18. Average palm kernel price realised slid by 32.7% from RM3,097/tonne in 1QFY17 to RM2,083/tonne in 1QFY18.

• GenP is sticking to its guidance of a FFB output growth of 15% to 20% for FY18F. GenP's FFB production growth of 20.0% in 1QFY18 was driven by the Indonesia unit. Indonesia accounted for 40.9% of GenP's FFB output in 1QFY18.

• GenP's FFB production in Indonesia climbed by 28% YoY in 1QFY18 partly underpinned by the acquisition of 12,893ha estates from Lee Rubber. GenP's FFB production in Malaysia grew by a smaller 15.0% YoY in 1QFY18.

• The implementation of a hike in minimum wage is expected to affect plantation companies negatively. GenP may incur additional wage costs of RM18mil to RM19mil per year if the monthly minimum wage is raised from RM1,000 to RM1,500. For every RM100/month increment, GenP is expected to incur additional costs of RM3.5mil to RM4mil per year.

Source: AmInvest Research - 24 May 2018