- Genting Plantations Bhd (GenP) has signed a pact with Musim Mas Group to build an RM300mil palm oil refinery at the Palm Oil Industrial Cluster in Lahad Datu. Musim Mas will have a 28% stake in the refinery while GenP will own the balance 72%.

- The refinery will have an annual capacity of 600,000 tonnes per year. The refinery is expected to be completed in 2H2016. The construction cost of the refinery translates into RM500 per tonne, which is reasonable.

- We are neutral on this development. It appears that GenP is investing more in downstream activities.

- We believe that refining margins in Malaysia have stabilised although still small. We reckon that the refinery is unlikely to contribute significantly to GenP’s bottomline in the future although volatilities in the CPO price cycle may result in occasional losses.

- Currently, GenP has a biodiesel plant with a capacity of 100,000 tonnes per year and a biorefinery plant, which has a capacity of 200,000 tonnes per year. GenP’s biodiesel activities broke-even in FY14.

- We believe that palm products from the GenP/Musim Mas refinery will be the feedstock for GenP’s biorefinery in the future. GenP plans to produce high value added palm derivative products at the biorefinery, which is presently being retro-fitted. The retro-fitting is expected to be completed in FY17F.

- Currently, Malaysia has 52 palm refineries with a capacity of 25.6mil tonnes per year in total. In contrast, the country’s CPO production is forecast at 19.7mil tonnes for 2015F.

- Sabah has 11 refineries with an annual capacity of 7.5mil tonnes per year. In the Palm Oil Industrial Cluster at Lahad Datu, we believe that there are six palm oil refineries with total capacity of more than two million tonnes per year.

- Some of these refineries are owned by Felda Global Ventures, Kwantas Corporation and KL Kepong.

- Maintain HOLD on GenP. We have not imputed any contribution from the proposed GenP/MusimMas refinery into GenP’s earnings forecast.

Source: AmeSecurities