Results

1H13 core net profit of RM121.4m (-18.3%) came in below expectations, accounting for 39.8% and 37.7% 39.8% of HLIB and consensus full-year forecasts, respectively.

Deviations

• Lower-than-expected realized average selling price; and
• Higher-than-expected losses at the biotech division.

Dividend

Declared an interim GDPS of 3.75 sen (payable 17 Oct 2013).

Highlights

QoQ. 2Q13 core net profit declined by -46.4% to RM42.4m mainly on the back of lower FFB production and higher production cost at the Malaysian plantation operations as well as the absence of lumpy industrial property land sale recognition that dragged property earnings lower.

YoY. Despite revenue declining by only 1.1% (to RM290.7m), 2Q13 core net profit declined by a much larger magnitude (-39.3%) to RM42.4m mainly on the back of higher production costs and lower palm product prices (CPO: -27.5%; PK: -35.7%), which more than offset higher property earnings (arising from strong demand for industrial and commercial properties in Genting Indahpura).

Conference call highlights: (1) New planting remained slow and expected to fall behind target for FY13; (2) Production cost guidance in 2013 which is expected to be lower yoy due to higher production and lower fertilizer costs; and (3) Industrial land sale likely in FY14 with potential deals at final stage of negotiations.

Risks

• Earlier-than-expected recovery in edible oil demand and prices; and
• Weather uncertainties revisit, which would have a positive impact edible oil prices. Forecasts
• 2013-15 net profit forecasts lowered by 6.2%, 2.7% and 3.8% respectively, largely to reflect: (1) A slightly lower average selling price assumption in 2013 (to reflect the selling price achieved in 1H) and higher loss assumptions at the biotechnology division in 2013; and (2) A slightly higher production cost assumptions in its Indonesian plantation segment.

Rating

HOLD

Negatives – (1) Weak global economic outlook and impending excess supply of CPO will affect both demand and prices of CPO; and (2) Demanding valuation.

Positives – (1) Increasing contribution from oil palm in Indonesia; (2) Strong balance sheet and (3) Potentially, upside surprises to earnings from JPO.

Valuation

SOP-derived TP lowered by 2.5% to RM10.31 to reflect the lower net profit forecasts as well as latest net cash position. While valuation seems more appealing following the recent selldown, we are keeping our HOLD call on the stock for now pending a review in our average CPO price assumptions (with downward bias). Our sensitivity analysis indicates that every RM100/tonne change in our CPO price assumption will result in a 5% change in our TP.

Source:Hong Leong Investment Bank Research- 29 Aug 2013