9M18 core net profit of RM134.2m (-41.6%) disappointed, accounting for only 43.8-46.7% of our and consensus full-year forecasts. Key variances against our forecast include (i) lower-than-expected realised palm product prices, and (iii) higher-than-expected finance cost. Management guided FFB production growth of 12% in 2018 and such growth trajectory will sustain into 2019, underpinned mainly by young age profile for its estates in Indonesia. We lower FY18-20 core net profit forecasts by 31.3%, 1.4% and 0.7%. Post earnings adjustment, we maintain our HOLD rating with lower SOP-derived TP of RM10.04 (from RM10.14 previously).

Below expectations. 3Q18 core net profit of RM24.3m (QoQ: -33.8%; YoY: -69.3%) took 9M18 core net profit to RM134.2m (-41.6%). The results came in below expectations, accounting for only 43.8-46.7% of our and consensus full-year forecasts. Key variances against our forecast include (i) lower-than-expected realised palm product prices, and (iii) higher-than-expected finance cost.

QoQ. 3Q18 core net profit shrank 33.8% to RM24.3m, as higher FFB production (+5.4%), improved property earnings, and lower biotechnology losses were more than offset by lower realised palm product prices.

YoY. The 69.3% decline in 3Q18 core net profit was dragged mainly by lower realised palm product prices and higher finance cost, but partly mitigated by a 3.7% increase in FFB production and improved property earnings.

YTD. 9M18 core net profit declined by 41.6% to RM134.2m as the 9% increase in FFB production and improved property earnings were more than negated by lower realised palm product prices and higher finance cost.

FFB growth trajectory to sustain into 2019. YTD, FFB production grew 9% to 1.47m tonnes, as the 3% decline in Malaysia’s FFB production (resulting from a shift in cropping pattern arising from wet weather in end-2017 and early-2018 and reduced harvesting area arising from replanting activities) was more than mitigated by rising Indonesia’s crops. For FY18, management guided for 12% growth in FFB, and such growth trajectory will sustain into FY19, driven by increased harvesting areas and more areas moving into higher yielding brackets in Indonesia.

Forecast. We lower FY18 core net profit forecast by 31.3% to RM210.2m mainly to account for lower realised palm product prices YTD and higher finance cost assumption. FY19-20 core net profit forecasts were tweaked lower by 1.4% and 0.7% respectively, mainly to account for higher finance cost assumptions.

Maintain HOLD, TP: RM10.14. Maintain HOLD rating with lower SOP-derived TP of RM10.04 (from RM10.14 previously) to reflect the downward revision in our core net profit forecasts. While we like GENP for its young age profile and healthy balance sheet, we believe near-term upside is capped by current weak CPO price and property sentiment.

Source: Hong Leong Investment Bank Research - 30 Nov 2018