Results

• FY15 core net profit of RM210.6m (-44.6% yoy) came in below our expectation but within consensus, accounting for 91% and 101% of our and consensus full-year forecasts.

Deviations

• Higher than expected cost of production.

Dividend

• Declared dividend of 3.5sen/share and bringing the total dividend to 5.5sen/share. This translates into dividend yield of 0.5%.

Highlights

• Better qoq 4Q15 performance was supported by 1) better FFB production and ASP; 2) improvement in property division; and 3) higher income from biodiesel operation.
• For full year 2015, decline in core net profit was mainly due to weaker CPO and PK ASP as well as lower contribution from property division despite better contribution from biodiesel operation and JPO.
• Higher than expected cost of production. GENP reported CPO cost of production of RM1,253/tonne (+6.4% yoy) and RM2,100/tonne (+10.5% yoy) for its Malaysia and Indonesia operation, respectively in 2015, above ours and management's previous guidance of RM1,200 and RM2,000/tonne. It was due to from higher fertiliser cost owing to the weakening in Rupiah and Ringgit, higher upkeep cost and rising labour cost.
• 5-7% FFB production growth in 2016. GENP reported FFB production growth of 4.3% yoy to 1.73m tonnes in 2015. This is in line with our expectation but lower than management guidance of 6-7%. Going into 2016, we are expecting FFB production growth of 5-7%, in line with management expectation, supported by the young prime area in Indonesia estate while production in its Malaysia’s estates is expected to be weaker (decline by about 5-6% yoy) due to dry weather and replanting activities.
• Better FFB production in 2Q16 onwards. Management is expecting production to stay weak in 1Q16 with better production to come in 2Q16 onwards. Jan 15 production was down 18% mom while Feb 16 production is likely to decline by 20% mom.

Risks

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

Forecasts

• We revised our 2016 and 2017 earnings forecast downward by 2-3% to factor in 2015 performance.

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

• Downgrade to HOLD with lower target price of RM11.40 (previous TP: RM11.75), based on SOP after adjusting for GENP’s latest net debt position.

Source: Hong Leong Investment Bank Research - 23 Feb 2016