Results

• 1HFY15 core net profit of RM116m (-30.6%) came in below expectations, accounting for only 35.4-37.9% of consensus and our full-year forecasts.

Deviations

• Lower-than-expected realized CPO selling price and FFB production.

Dividend

• Declared 1st interim single-tier DPS of 2.5 sen (entitlement date: 30 Sep 2015; payment date: 19 Oct 2015).

Highlights

• QoQ… 2QFY15 core net profit declined by 34.9% to RM45.7m, and the decline was due largely to weaker contribution from plantation operations in Indonesia and lower property earnings (arising from the absence of gains from divestment of Genting Permaipura operations, which was recognized in 1QFY15), which altogether more than offset improved earnings contribution from plantation operations in Malaysia and higher biodiesel sales.
• FFB production… Although FFB production in Indonesia in 1H was slightly behind schedule, management remains optimistic that it will pay a catch up in 2H, as blockage by villagers has been largely resolved, and it expects FFB production to pick up significantly from Aug-15 (and will likely last through Nov).
• Biodiesel segment turned around… with a PBT of RM0.9m (from a loss of RM1.1m in the previous quarter), thanks to higher biodiesel sales (which sales volume has increased by 36% to 8,600mt). Management remains positive on this segment, underpinned by the extension of Biodiesel usage to the industrial sector in Sabah.
• Property segment… Despite the soft property market sentiment, management still sees sustained interests in industrial land in Kulai area (mainly for industrial development purpose).

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

• FY15-16 core net profit forecasts cut by 8.5-10%, largely to reflect lower CPO price achieved YTD, and a slight downward adjustment in our FFB yield assumptions for the Indonesian plantation operations. No change in our FY16 average CPO price assumption for now, pending a review (with downward bias) in our sector-wide CPO price assumption.

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

• Post earnings revision, SOP-derived TP was lowered to 6.5% to RM9.82 (see Figure 5). Maintain HOLD recommendation for now.

Source: Hong Leong Investment Bank Research - 26 Aug 2015