Results

• 9MFY14 core net profit of RM235m (+21.9%) came in within our expectation, accounted for 75.7% of our full-year forecast. Against the consensus, the results only accounted for 69.4% of consensus full-year forecast.

Highlights

QoQ… Although  the  plantation  division  registered  a  9.7% decline  in  operating  profit,  3QFY14  core  net  profit increased  by  3%  to  RM67.9m,  as  the  weaker  plantation performance  (arising  from  lower  palm  product  prices)  was more than mitigated by higher property  earnings.

9MFY14  FFB  output  rose  11.4%  to  1.06m  mt,  driven largely  by  a  76.5% increase in FFB production in Indonesia (and  this  has  also  resulted  in  the  Indonesian  operations turning  to  the  black,  with  an  operating  profit  of  RM13.4m vis-à-vis  a  loss  of  RM1m  in  the  previous  year).  Moving  into 2015,  it  has  guided  an  overall  FFB  output  growth  of  13%, with  Indonesia  being  the  main  growth  driver  (whereby  FFB production  is expected to grow  by 70% to 535k mt).

Production  cost  guidance   for  FY14…  YTD,  GENP recorded  an  all  in  CPO  production  cost  of  RM1,370/mt  (on blended  basis)  and  it  is   guiding  for  a  slightly  lower production  cost  for  FY14  (at  ~RM1,350/mt)  on  lower fertilizer  application  (90%  of  its  full -year  fertilizer requirement   has  already  been  locked  in  by Oct-14).  Moving into  2015,  we  believe  production  will  likely  end  up  higher, due  to  higher  fertilizer  prices  and  wages,  as  well  as  lower PK credit.

Biodiesel…    GENP  has  already  signed  supply  contract with  2  of  the  3  petroleum  producers  for  the  supply  of  B7 biodiesel  in  Sabah.  While  the  quantity  of  biodiesel was not specified,  our  back  of  the  envelope  calculation  indicates that  biodiesel  implementation  in  Sabah  will  boost  GENP’s earnings  by ~RM10m p.a. (or 3-4%).

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

• While  maintaining  our  FY14  net  profit  forecast,  we  nudged up  our  FY15-16  net  profit  forecasts   by  2.1-2.5%,  largely  to account  for  earnings  contribution  from  the  biodiesel production.   

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

• SOP-derived TP raised  by 10.4% to RM10.50  to  reflect  higher  net  profit  forecasts  and  its  latest  net  cash position. Maintain HOLD  recommendation.

Source: Hong Leong Investment Bank Research - 21 Nov 2014