- Maintain HOLD on Genting Plantations Bhd (GenP) with a lower fair value of RM10.65/share. Our fair value is based on a fully diluted FY5F PE of 28x. We have reduced GenP’s FY15F EPS by 12% to account for lower plantation operating margin.

- We have forecast GenP’s plantation EBITDA to ease marginally in FY15F due to higher production costs and flattish CPO price.

- Production costs per tonne in Malaysia could be slightly higher in FY15F compared with FY14F’s RM1,200/tonne dragged by a 10%-11% increase in fertiliser costs in 1HFY15.

- However in view of the recent plunge in crude oil prices, fertiliser prices could soften in 2HFY15. A negating factor is that fertiliser is imported in USD.

- Production costs per tonne in Indonesia in FY15F are expected to be lower than FY14F’s RM2,000/tonne due to an expansion in FFB output.

- GenP’s FFB production in Indonesia is estimated to climb by 65% in FY15F underpinned by an increase in mature areas of 10,000ha. We believe that the expansion in FFB output could have been higher if not for the lagged impact of the dry weather, which took place in Kalimantan in October 2014.

- We gather that the lagged impact is already taking effect as production volumes in January and February 2015 are anticipated to be weaker than December 2014’s.

- New plantings are expected to improve from 3,600ha in FY14F to 7,000ha in FY15F. GenP’s new plantings were small in FY14F due to the temporary suspension of its RSPO membership. New planting cost is estimated at RM13,500/ha to RM14,000/ha.

- Biodiesel is not envisaged to be a major earnings driver although we reckon that GenP is the largest producer in Sabah. GenP’s biodiesel production volume is roughly 5,000 to 6,000 tonnes per month. Sabah’s biodiesel take-up is estimated at 70,000 to 80,000 tonnes per year.

- We understand that the operating margin for biodiesel manufacturing is decent at more than 10%. Currently, GenP produces biodiesel for the implementation of B7 in Sabah. Exports of biodiesel are minimal as fossil fuel is cheaper than biodiesel.

Source: AmeSecurities