GENP’s 1Q18 core net profit of RM73.2m (QoQ: -21.5%; YoY: -1.9%) missed expectations, accounting for only 19.8-20.5% of consensus and our full-year forecasts. Key variances against our forecast include higher-than-expected production cost (in particularly, Indonesian operations) and finance costs. We cut our FY18-20 core net profit forecasts by 12.2-14.2%, largely to account for higher production cost (for Indonesian operations) and finance cost assumptions. Maintain HOLD rating with lower SOP-derived TP of RM10.14 (from RM11.32 previously) as we adjusted our core net profit forecasts and roll forward our valuation base year.

Missed expectations. 1Q18 core net profit of RM73.2m (QoQ: -21.5%; YoY: -1.9%) missed expectations, accounting for 19.8-20.5% of consensus and our full-year forecasts. Key variances against our forecast include higher-than-expected production cost (in particularly, Indonesian operations) and finance costs.

QoQ. 1Q18 core net profit declined by 21.5% to RM73.2m as the RM25m realised profit arising from palm inventory drawdown and higher property earnings were more than offset by seasonally lower FFB production, lower palm product prices, lower downstream earnings, lower JV contribution, and higher finance cost.

YoY. Despite having posted a 32.2% growth in revenue (boosted mainly by higher offtake from its refinery and progressive completion of development projects), 1Q18 core net profit declined by 1.9% to RM73.2m, as higher earnings contribution from the downstream division was more than offset by higher finance cost and lower palm product prices.

FFB output growth guidance maintained. FFB production rose 20% YoY to 486k tonnes in 1Q18, driven by stronger FFB yield achieved in Malaysian operations and additional harvesting areas in Indonesia. Management is keeping to its FFB output growth guidance of 20% for FY18, with Indonesia to remain as the driver to FFB output growth as more areas are moving into mature and higher yielding bracket.

Forecast. We cut our FY18-20 core net profit forecasts by 14.2%, 12.2% and 12.8% respectively, largely to account for higher production cost (for Indonesian operations) and finance cost assumptions.

Maintain BUY, TP: RM10.14. We lower our SOP-derived TP by 10.4% to RM10.14 (from RM11.32 previously) to reflect the downward revision in our core net profit forecasts and roll-forward of valuation base year to FY19. While we like GENP for its young age profile and healthy balance sheet, we believe current weak CPO price and property sentiment. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 24 May 2018