Results

• 1Q16 core net profit of RM37.8m (-40.4% qoq, -44.7% yoy) came in below our and consensus expectation, accounting for 12-13% of our and consensus full-year forecasts.

Deviations

• Lower than expected FFB production.

Dividend

• -

Highlights

• Sharp qoq decline in 1Q16 net profit was mainly due to 1) the lower EBITDA contribution from its plantation division dragged by lower FFB production during the quarter, 2) weaker performance from its property division and 3) losses incurred in its downstream operation.
• Plantation operation in Malaysia recorded contraction in EBITDA mainly due to sharp decline in FFB production (- 22% yoy) affected by lagged impact from dry weather in previous year and less harvesting area as a result of aggressive replanting activities. On the other hand, its Indonesia operation reported improved EBITDA on the back of better FFB production of about 105,000 tonnes (+25% yoy) especially from Central Kalimantan’s estates while its West Kalimantan’s estates were affected by heavy rainfall and flooding in some areas.
• Overall, GENP reported 1Q16 FFB production of 315,729 tonne (-37.0% qoq, -10.8% yoy). This is below our expectation and management guidance of 5-7% yoy for 2016 as the lagged impact from El Nino is more severe than expected. Production is likely to stay weak in coming months before picking up in Aug 16. Thus, we are revising our FFB production forecast and now expecting flat FFB production in 2016 with better production from Indonesia mitigating the weak production in Malaysia especially from Sabah’s estates.

Risks

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

Forecasts

• We revise our earnings forecast downward by 6-9% for 2016-2017 as we lower our FFB production forecast.

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 RM11.10 (previous TP: RM11.40), based on SOP.

Source: Hong Leong Investment Bank Research - 24 May 2016