Results

• 2Q17 core net profit of RM76.2m (qoq: +2.1%; yoy: +112.2%) took 1H17 core profit to RM150.9m (+110.6%). The results came in below expectations, accounting for 40.6-43.4% of consensus and our full-year forecasts.

Deviations

• Early adoption of accounting standards (MFRS 116 and 141), resulted in higher depreciation expenses.

Dividend

• None.

Highlights

• QoQ… 2Q17 core net profit increased marginally (by 2.1%) to RM76.2m as lower palm product prices were offset by higher FFB production and higher CPO sales to the downstream manufacturing segment (which were held as stocks at end 1Q17).
• YoY… 2Q17 core net profit more than doubled to RM76.2m (from RM35.9m a year ago), boosted mainly by higher FFB production and CPO selling prices).
• YTD… 1H17 core net profit more than doubled to RM150.9m (from RM71.6m a year ago), boosted mainly by higher FFB production and palm product prices at the plantation segment, lower losses at the biotechnology segment (following a lumpy write-off in end-2016) and turnaround at the downstream manufacturing segment (in particularly, the biodiesel plant).
• Indonesia to dominate FFB production growth in 2H17... GENP’s FFB production registered 34% increase in 1H17 (on the back of a 16% and 80% increase in Malaysia and Indonesia operations, as lagged impact of El Nino subsided and more areas moving into mature and higher yielding bracket in Indonesia). Moving into 2H, management shared that Indonesia operation will be dominating the group’s FFB production growth, while that of Malaysia operation is likely to taper off.
• More meaningful GHPO contribution from 2H17… The opening of GHPO (since end-1H17) has performed well (and exceeded management’s expectation), and we are expecting contribution from GHPO to contribute more meaningfully from 2H17.

Risks

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

Forecasts

• We lower our FY17-19 core net profit forecasts by 7.6%, 6.6% and 6.5% respectively, largely to account for higher depreciation charges (arising from the change in accounting standards).

Rating

HOLD (↔)

• While we like GENP for its efficient management team, young age profile, and healthy balance sheet, we believe near-term upside is capped by the weak property sentiment in Johor, a drag on its earnings growth.

Valuation

• Post adjustment to core net profit forecasts, SOP-derived TP was lowered by 5.8% to RM11.50 .

Source: Hong Leong Investment Bank Research - 24 Aug 2017