-  We are upgrading Genting Plantations (GenP) from SELL to HOLD as its share price has fallen below our fair value of RM10.75/share. Our fair value for GenP implies an FY15F fully diluted PE of 19.3x.

-  GenP’s 1HFY14 core pre-tax profit (ex-RM5.9mil unrealised forex gains) fell short of our expectations due to lowerthan-estimated property profits and a high effective tax rate. We have reduced GenP’s FY14F EPS by 15% to account for these.

-  GenP expects to achieve a FFB output growth of 10% in FY14F (1HFY14: 11.1%). FFB production in Indonesia is envisaged to grow by 75% to 80% in FY14F while FFB output in Malaysia is estimated to rise by 2%. GenP’s FFB production in August is anticipated to be 12% higher than July.

-  We understand that Peninsular Malaysia recorded low rainfall in 1QFY14. As a result, FFB yields could be affected at end-FY14F or early-FY15F. Rainfall patterns in Sabah and Kalimantan are normal.

-  Production costs were RM1,220/tonne in 1HFY14 and RM1,265/tonne in 2QFY14. Production cost is expected to be RM1,200/tonne in FY14F.

-  GenP applied 46% of its full-year fertiliser requirements in 1HFY14. There was a delay in fertilisation in 1HFY14 due to late deliveries in Sabah.

-  GenP’s new plantings amounted to 927ha only in 2QFY14 due to the suspension of its RSPO membership. However, new plantings should pick up in 2HFY14 as the suspension of the membership has been lifted. GenP’s new plantings are forecast at 4,000ha to 4,500ha in FY14F (1HFY14: 3,056ha).

-  There is no clarity on Indonesia’s proposed limit on foreign ownership of plantations yet. Like the other planters, GenP is waiting to see whether the bill would be passed and the details of the bill.

-  GenP has received strong orders for biodiesel due to the fall in CPO price. Customers are mainly located in Europe. GenP expects to start commissioning its second biodiesel plant in Lahad Datu soon. In 1HFY14, GenP did not produce any biodiesel as CPO prices were high.

-  Biotechnology division is expected to roll-out its seed screening facility soon. This will be used internally for GenP’s replanting and new planting programme first before being offered to external parties.

Source: AmeSecurities