Highlights

• FFB output growth to mitigate lower palm prices… GENP registered FFB output growth of 28.5% yoy in 1Q17 , boosted by yield recovery (as lagged impact of El Nino subsided since end-FY16) and more areas moving into mature and higher yielding bracket (for its plantation estates in Indonesia). Management remains confident that the strong FFB output growth achieved in 1Q17 will sustain into the next few quarters (with output ratio of 45:55 in 1H and 2H), underpinned by young age profile for its plantation operations in Indonesia (with average age of only ~ 5 years as at end- FY16), which will in turn cushion lower palm product prices.
• The opening of GHPO to boost JV’s earnings from 2H… We expect the opening of Genting Highland Premium Outlet (GHPO, likely by end-2Q) to perform as well as Johor Premium Outlets (JPO), i f not better, as it will be serving a more diverse group of shoppers vis-à-vis JPO, due to its close proximity to GITP and Klang Valley.
• Unexciting times remain for property division… We believe earnings at the property division will remain unexciting in FY17, due to the weak property sentiment and the absence of sizeable property land disposal (following AEON’s recent announcement to abort its property land acquisition deal with GENP).

Catalysts

• Higher-than-expected FFB output growth;
• Better-than-expected JV earnings (in particularly, the premium outlets); and
• Earlier-than-expected commission of metathesis plant.

Forecasts

• We raise our FY17-19 core net profit forecasts by 4.5%, 9.1% and 8.1% respectively, largely to account for: (1) Higher JV earnings assumptions (underpinned by the opening of GHPO); and (2) Lower depreciation charge assumption at biotechnology division (post RM80.2m write-off in 4Q16). Risks – downside
• Weaker-than-expected FFB output;
• Escalating labour cost, which will in turn result in higher production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Rating

HOLD (↔)

• While we continue to like GENP for its young age profile (average age of ~10 years for its plantation assets) and healthy balance sheet (net gearing of 0.23x as at end-FY16), near-term upside is capped by recent downtrend in palm product prices and persistently weak property sentiment in Johor.

Valuation

• Maintain HOLD recommendation, with higher SOP-derived TP of RM12.21 (vs. RM12.02 previously) to reflect the upward adjustment in our core net profit forecasts.

Source: Hong Leong Investment Bank Research - 25 Apr 2017