Results

• 9MFY15 core net profit of RM153.7m (-34.2% yoy) came in below expectations, accounting for only 56-59% of consensus and our full-year forecasts.

Deviations

• Lower-than-expected realized CPO selling price.
• Higher-than-expected depreciation and finance costs.

Dividend

• -

Highlights

• Qoq decline in core net profit was mainly due to lower palm product prices, high manuring costs despite higher property sales by its property division. Indonesia operation recorded EBITDA losses of RM7.7m (profit of RM4.9m in 2QFY15) mainly due to lower selling prices and implementation of palm oil export levy as well as higher cost of production as more areas came into maturity.
• Better FFB production in 4QFY15. GENP reported FFB production growth of 3.7% yoy to 1.23 tonnes in 9MFY15. Production is likely to improve in 4QFY15 supported by higher FFB production coming from its Indonesia estates. For full year, we are expecting 5-7% FFB production growth, in line with management guidance.
• Inventory drawdown helps to support 4QFY15 performance. In 3QFY15, GENP recorded more than 2,000 tonne increase in CPO inventory level mainly due to the timing of delivery. We believe that this is likely to be drawn down in the next quarter and would help to boost the sales volume in 4QFY15.
• Better contribution from biodiesel operation with ongoing biodiesel supply for the B7 biodiesel mandate and additional contribution coming from tolling arrangement to produce biodiesel for third party. However contribution from this segment is relative small as compared to its other segments. In 3QFY15, its downstream operation reported EBITDA of RM1.1m (2QFY15: RM0.9m)

Risks

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

Forecasts

• FY15-16 core net profit forecasts cut by 8-16% largely to reflect lower CPO price achieved YTD as well as higher depreciation and finance costs.
• 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 HOLD with lower Target Price of RM9.25 (previous TP: RM9.82), based on SOP.

Source: Hong Leong Investment Bank Research - 26 Nov 2015