Results

1HFY14 core net profit of RM167m (+33.6%) accounted for 53.8% of our full-year forecast. We consider the results within our expectation as we expect 2H earnings to come in weaker on the back of lower CPO selling prices (although it will be partly offset by seasonally higher FFB output in 2H). Against the consensus, the results only accounted for 44% of consensus full-year forecast.

Dividend

Declared interim DPS of 3 sen, payable on 17 Oct 2014. For the full-year, we are projecting a total DPS of 17 sen, translating to a projected dividend yield of 1.7%.

Highlights

YTD… 1HFY14 core net profit increased by 33.6% to RM167m mainly on the back of higher FFB output (as more areas reached maturity and existing harvesting areas progressed into higher yielding brackets in Indonesia as well as yield recovery in Sabah) and palm product prices, as well as lower fertilizer costs.

The uplift of RSPO suspension does not translate to higher new planting development works, at least for now. GENP achieved total new planting of 3,056 ha in 1HFY14, and management guided that total new planting for the full year will likely fall short of its initial target (of 6,000 ha) by 1,500-2,000 ha, dragged by the RSPO suspension earlier. Despite the uplift of RSPO suspension (effective yesterday), management highlighted that it would not go aggressive in its new planting development works, given the uncertainties arising from the recent draft bill that proposes to limit foreign ownership on plantation assets in Indonesia.

Renewed interest on biodiesel. The recent decline in CPO prices (resulted in wider spread between palm and oil prices, hence improved economic viability) has reignited interest in biodiesel, witnessed by the resumption in GENP’s biodiesel plant activities since July-14. While the plant has yet to reach full capacity, management highlighted that it can easily fill up its capacity utilization based on current market condition (that is in favour of biodiesel).

Risks

• Economic uncertainties in world’s major economies that may hurt demand and prices of edible oil (including palm oil); and
• Escalating CPO production cost.

Forecasts

Maintained.

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

Valuation

Maintain SOP-derived TP of RM9.51 (see Figure 5).

Source:Hong Leong Investment Bank Research- 28 Aug 2014