• GENP’s 1Q17 net earnings came in-line with our expectation.

• PBT increased nearly three-fold to RM80.1m on the back of 53% increase in revenue to RM400m, mainly due to higher palm product prices and FFB production.

• Maiden sales of refined palm product following the commencement of refinery operations in Lahad Datu along with higher biodiesel sales contributed to higher revenue.

• Group FFB production increased 29% yoy in 1Q17, driven by Indonesia-estates that grew by 48% yoy to 155k MT and by 19% (250k MT) in Malaysia.

• Maintain our FY17 and FY18 earnings forecast with unchanged TP of RM11.22.

Earnings came-in within expectation

GENP’s 1Q17 earnings of RM80.1m is within our expectation. This was largely attributed to better plantation profit due to higher selling palm product prices. The higher prices more than compensated unrealized profit during the quarter in relation to the inter-segment sales of CPO to Downstream Manufacturing segment which are held as stocks as at end of the quarter. Management indicate that stocks currently stood at 18k MT as opposed to 6k MT-8k MT in normal circumstances. As such, EBITDA improved to 36% as against 24% in 1Q16.

Cost of production was well maintained

Earnings for group plantation segment more than doubled to RM140.9m, thanks to the Plantation-Indonesia segment which saw earnings increased more than 100% to RM59m (1Q16: RM12.3m). The Group also managed to keep CPO cost lower for 1Q17 at RM1,350/MT vs. RM1,730/MT in 1Q16. The higher ASP realized and lower costs helped to improve the group’s plantation margin to 55.6% from 30.4% recorded in 1Q16.

Property segment

As for property segment, lower result was due to additional profits recognized from completion of projects in 1Q16. These factors dragged down property segment earnings lower yoy. According to management, total sales achieved in 1Q17 was RM27m, about the same as last year’s. Meanwhile, its unbilled sales stood at RM26m as at 31 March 2017.

Lower earnings qoq

GENP’s qoq PBT was lower by 55% compared to the immediate preceding quarter, reflecting the lower performance from all segment, due to 1) lower FFB production from both Plantation’s Indonesia and Malaysia, 2) adjustment for unrealized profit in relation to inter-segment sales of CPO to Downstream Manufacturing segment which are held as stocks as at end of the quarter amounting c. RM29m, 3) lower contribution from property segment, and 4) foreign currency translation loss of RM2.7m arising from Group’s USD denominated cash reserves from gain of RM12.4m in 4Q16.

Outlook

As for the coming quarter, we expect FFB production to rise in lower teens compared to 1Q17. This will be driven by higher crop from Indonesia as more areas come into maturity and existing mature areas moved into higher yielding age brackets. Management indicate that FFB growth in Malaysia for April-May period increased 20% yoy with Indonesia growth exceeded 30%. However, we expect the higher Group’s production growth to be tempered by replanting activities, as well as lower growth from Malaysian estates. As such, management indicate that Group’s FFB growth in 2017 to rise by double-digit growth, i.e. possibly by 15%-16% yoy.

Maintain HOLD recommendation

We keep our FY17 and FY18 earnings forecasts unchanged with TP of RM11.22 on PER of 26x (GENP’s 3- years average) over FY17 EPS. Maintain HOLD.

Source: BIMB Securities Research - 30 May 2017