Highlights

GenP’s operations in Indonesia is on track to deliver 180- 200k mt of FFB in 2013 (~100% growth from 81k mt in 2012, which will in turn translate to the group’s total FFB growth of 10.8% in 2013, based on our projection). For 2014, management expects the Indonesian operations to register at least 50% FFB output growth (to 300k mt).

Production cost will decline to ~RM1,350/mt in 2013 (from RM1,510/mt in 1H13) on lower fertilizer cost and seasonally higher FFB. Despite potential minimum wage hike, management highlighted that higher labour cost (arising from the potential minimum wage hike) will somewhat be offset by lower fertilizer cost and higher FFB output next year.

New planting in Indonesia could come in lower than 6,400 ha achieved in 2012, due mainly to delay in obtaining regulatory approval. Nevertheless, management remains hopeful that new planting will pick up in 2014, as it expects to obtain planting approval from relevant authority by end of this year

We believe the opening of the Phase 2 of Johor Premium Outlet and AEON Kulai will continue boost economic activities, hence sustaining demand and prices of properties in Kulai area.

Catalysts

• CPO prices recover further;
• Better-than-expected sales at the property division; and
• Higher-than-expected dividends.

Forecasts

Maintained. Ceteris paribus, every RM100 change in our CPO price assumption will result in ~8% change in Genting Plant’s 2014 and 2015 projected EPS.

Risks - downside

• Weaker-than-expected FFB output;
• Escalating labour cost, which will in turn result in higher production cost;
• Weaker-than-expected recovery in edible oil demand and prices; and
• Weaker-than-expected demand and prices of property in Johor.

Rating

HOLD

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

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

Valuation

We are keeping our SOP-derived TP of RM10.31 and HOLD recommendation on the stock unchanged pending its 3Q13 results announcement next month.

Source: Hong Leong Investment Bank Research - 29 Oct 2013