Investment Highlights

• We are keeping our HOLD recommendation on Genting Plantations (GenP) with an unchanged fair value of RM10.40/share. Our fair value for GenP is based on an FY19F fully diluted PE of 25x.

• GenP's 1HFY18 core net profit (ex-disposal and forex gains of RM17.6mil) was below consensus estimates and our expectations. We have reduced GenP’s FY18F net profit by 22.7% to account for a higher effective tax rate of 27% vs. 25% previously, a weaker operating profit margin for the Malaysia plantation division and a lower FFB production growth of 14% compared with 19% originally.

• GenP’s core net profit slid by 49.7% QoQ to RM36.7mil in 2QFY18 as the EBITDA of the Malaysia plantation unit plunged by 52.6% to RM56.9mil. Apart from a weaker CPO price, the Malaysia division was hit by higher fertiliser costs and a 16.0% decline in FFB production in 2QFY18. GenP applied more fertiliser in 2QFY18 vs. 1QFY18.

• We understand that FFB production in Malaysia was weak in 2QFY18 as heavy rains in Peninsular Malaysia in late 2017 and early 2018 affected fruit formation. There were only three times in the past 15 years whereby GenP’s FFB production in 2Q is lower than 1Q. In most times, FFB output in 2Q is higher than 1Q.

• Comparing 1HFY18 against 1HFY17, GenP’s core net profit fell by 27.6% to RM109.5mil dragged by lower CPO and palm kernel prices. Although GenP’s FFB production climbed by 12.0% YoY in 1HFY18, this was not enough to offset the negative impact of weaker palm prices.

• As a result, EBITDA of the Malaysia division dropped by 6.2% YoY to RM177.0mil in 1HFY18 while in Indonesia, EBITDA declined to RM72.8mil in 1HFY18 from RM99.7mil in 1HFY17.

• Group average CPO price slipped by 18.4% from RM2,861/tonne in 1HFY17 to RM2,336/tonne in 1HFY18. Average palm kernel price shrank by 9.5% from RM2,108/tonne in 1HFY17 to RM1,908/tonne in 1HFY18.

• GenP’s FFB production growth of 12.0% YoY in 1HFY18 was driven mainly by the Indonesia unit. The division recorded a YoY increase of 38.5% in FFB production in 1HFY18. Indonesia accounted for 45.3% of group FFB output in 1HFY18. GenP’s Malaysia division registered a 3.4% decline in FFB production in 1HFY18.

• The imposition of the sales and services tax (SST) on 1 September 2018 may result in higher operating costs to upstream plantation companies. This is because the SST may be imposed on certain items like diesel. Previously, plantation companies could offset the GST of inputs against outputs.

Source: AmInvest Research - 29 Aug 2018