Highlights

• Genting Plantations (GENP) announced that it has entered into collaboration with Musim Mas Group to establish a palm oil refinery in Palm Oil Industrial Cluster (POIC) in Lahad Datu, Sabah.

• Entailing an investment of RM300m, the refinery (which will have yearly capacity of 600,000 mt), is targeted to complete by 2H16. This refinery will be part of the larger Genting Integrated Biorefinery Complex that GENP is setting up for the production of high value-added downstream products.

• Under this collaboration, Musim Mas has a 28% stake in the entity, while GENP will hold the remaining 72% stake.

Pros/Cons

• Positive, as the venture will be able to leverage on Musim Mas’ extensive experience in processing and marketing of refined palm oil products. It is also 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

HOLD

Positives

• (1) Increasing contribution from oil palm inIndonesia; (2) Strong balance sheet; and (3) Potentially, upside surprises to earnings from JPO.

Negatives

• (1) Less upbeat overall demand outlook forproperty sector; and (2) low liquidity.

Valuation

Maintain SOP-derived TP of RM10.50 (see Figure 5) as well as our HOLD recommendation on the stock. While we like GENP for its decent FFB output growth, strong balance sheet, as well as its initiatives in expending into the downstream segment, we believe near-term upside is capped by its relatively pricey valuations.

Source: Hong Leong Investment Bank Research - 9 Mar 2015