Highlights

Genting Plantations (GENP) announced that it has entered into a Master Agreement with Elevance Revewable Sciences Singapore, for collaboration to produce high value palm oil, via a disposal of a 25% stake in Genting Integrated Biorefinery (GIB, which has a biodiesel plant in Lahad Datu, with annual capacity of 200k mt) for RM72m.

Elevance (founded in 2007) is the first company to successfully bridge the renewables and chemicals industries, transforming natural plant-based oils into specialty highperformance, cost effective commercial products.

Commercial shipments from Elevance’s first metathesis plant with a capacity of 180k mt in Gresik, Indonesia (in collaboration with Wilmar International) began in 2013, while its 2nd metathesis plant (with annual capacity of 280k mt, located in Mississippi, USA) is scheduled to be operational in 2016.

Under the master agreement, GIB’s existing biodiesel plant will be transformed to produce high value palm oil derivatives (such as olefins, specialty chemicals and saturated methyl esters) using Elevance’s metathesis technology for US$28.1m (or RM89.5m). The metathesis plant is expected to commence operation and production of high value palm oil derivatives by 2017.

Pros/Cons

Positive but not unexpected. We note that the latest development is in line with the group’s long term strategy to diversify its earnings base away from the upstream plantation business into high value added downstream activities.

Earnings Forecasts

Maintained, pending further update with management.

Risks

• Weaker-than-expected FFB production and OER;
• A sharp increase in production cost; and
• A sharp decline in vegetable oil prices.

Rating

BUY

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

Negatives – (1) Less upbeat overall demand outlook for property sector; and (2) low liquidity.

Valuation

Maintain SOP-derived TP of RM12.16 (see Figure 1) and BUY rating on the stock. We continue to like GENP for its: (1) decent FFB output growth (thanks to the young age profile for its palm estates in Indonesia); (2) strong balance sheet; and (3) its prized landbank in Kulai, which value has yet to be fully crystallized.

Source: Hong Leong Investment Bank Research - 14 Jul 2014