Investment Highlights

• Maintain HOLD on Genting Plantations (GenP) with a lower fair value of RM10.40/share (vs. RM10.75/share previously). Our fair value is based on a FY19F PE of 25x on revised fully diluted EPS of 41.5 sen.

• We have reduced GenP’s FY18F net profit by 7.4% to account for a lower plantation operating profit margin. We believe that GenP’s EBITDA margin would be weaker than expected in FY18F due to rising costs such as infrastructure, road repairs, fertiliser and wages. We have assumed an EBITDA margin of 33% for the plantation division in FY18F vs. 35% previously.

• Technology is expected to support GenP’s long-term growth. With technology, the group would be able to make better and timely decisions, which would improve operational efficiencies and reduce costs. Examples are more efficient application of fertiliser and fortifying of infrastructure before the onset of heavy rainfall.

• GenP’s oil palm estates in Malaysia and Indonesia are electronically linked. The plantation systems are linked to the SAP system and stored in a cloud. Data is real-time and can be immediately accessed by management and operational personnel. Going forward, GenP plans to expand into big data analytics so that information can be analysed and used effectively.

• Apart from technology, GenP plans to expand mechanisation in its oil palm estates in Indonesia. For example, GenP aims to introduce mechanised FFB collection and manuring in Indonesia. With mechanisation, machines and equipment are used to carry out activities instead of workers. This helps reduce labour costs and improve efficiency. In Malaysia, almost all of the group’s estate operations has been fully mechanised.

• To improve mechanisation, GenP is at the forefront of machine and equipment design. Last year, one of GenP’s inventions won a merit award from the MPOB. The Scavenger picks up loose fruits and removes dirt from the fruits. GenP has received enquiries from other parties to commercialise the machine. The machine is patented.

• In conclusion, we reckon that GenP’s fundamentals are sound in the long term. In the short term however, the group’s earnings are expected to be affected by languishing CPO prices.

Source: AmInvest Research - 11 Jul 2018