- Maintain BUY on Genting Plantations Bhd (GenP) with an unchanged fair value of RM11.16/share. Our fair value implies an FY16F fully-diluted PE of 27x. In spite of GenP’s weak results in 3QFY15, we are positive on the group’s prospects due to its young oil palm trees in Indonesia and healthy balance sheet.

- GenP’s 9MFY15 results were below consensus estimates and our expectations due to an RM7.7mil loss in the plantation unit in Indonesia in 3QFY15. The production cost of the Indonesia unit was RM2,000/tonne compared to the average CPO price realised of RM1,700/tonne in 3QFY15.

- We understand that CPO prices in Indonesia rose to RM1,900/tonne in October. This should help improve the profitability of the Indonesia unit in 4QFY15. The average CPO price realised was low in 3QFY15 due to the implementation of the export levy of US$50/tonne in July 2015. We have revised GenP’s FY15F EPS downwards by 20.6%.

- Comparing 9MFY15 against 9MFY14, EBITDA of the Indonesia unit fell from RM24.1mil to RM7.8mil. The division accounted for 3.3% of GenP’s plantation EBITDA and 22.8% of group FFB production in 9MFY15. Production cost of the Malaysia unit was RM1,200/tonne in 3QFY15.

- Compared to other plantation companies, GenP’s FFB production growth was decent at 3.7% YoY in 9MFY15. FFB output in Malaysia declined by 2.7% but in Indonesia, FFB production surged by 33.8%, driven by an increase in mature areas.

- We understand that the hike in the minimum wage in Malaysia would only increase production cost per tonne by RM12 to RM15 in FY16F. Fertiliser costs may rise by 5% in Malaysia in FY16F due to the appreciation of the USD against the RM. In Indonesia, fertiliser costs are expected to climb by a stronger 21% due to a different mixture of fertiliser used. Overall in FY15F, production cost of the Malaysia unit is estimated at RM1,200/tonne. Production cost per tonne in Indonesia is forecast to be lower than RM2,000/tonne in FY15F.

- We gather that GenP’s FFB production would improve by 6% to 7% in FY16F, which is similar to FY15F. The group’s FFB output in Indonesia is expected to expand by 40% to 45% in FY16F, which is lower than the earlier guidance of more than 50%. The weaker increase in FFB production in Indonesia is due to the lagged impact of the haze and drought, which took place in 3QFY15.

- GenP did not recognise any forex loss in 3QFY15 unlike its peers. We understand that this is because cash and profits of an Indonesian subsidiary have been moved to a Singaporean subsidiary, which reports its figures in USD.

Source: AmeSecurities Research - 26 Nov 2015