1Q19 core net profit of RM47.2m (QoQ: +166.6%; YoY: -35.6%) came in below expectations, accounting for only 17.2-19.6% of consensus and our full-year forecasts, mainly on lower-than-expected palm product prices. Performance of downstream segment improved for the third consecutive quarter (on YoY basis) with an adjusted EBITDA of RM22m, due mainly to higher offtake at both its biodiesel and refinery operations (which was in turn driven by export sales). We lower our FY19 core net profit forecast by -8.5% to RM220.7m, mainly to account for lower palm product prices in 1Q19, but maintain our FY20-21 core net profit forecasts for now, pending a further review in our palm oil price assumptions post reporting season. Maintain SOP-derived TP of RM9.50 and HOLD rating on the stock for now.

Below expectations. 1Q19 core net profit of RM47.2m (QoQ: +166.6%; YoY: - 35.6%) came in below expectations, accounting for only 17.2-19.6% of consensus and our full-year forecasts. Lower-than-expected palm product prices were the key variances against our forecast.

QoQ. Despite FFB production declining by -9.6% (due mainly to seasonal factor) and lower property earnings (due to slower recognition), 1Q19 core net profit more than doubled to RM47.2m (from RM17.7m in previous quarter), mainly on the back of inventory drawdown, better CPO selling prices, and higher offtake from both biodiesel and refinery operations at the downstream segment.

YoY. Core net profit declined by -35.6% to RM47.2m in 1Q19, as higher FFB production and offtake at both its biodiesel and refinery operations, coupled with better earnings contribution from premium outlets were more than offset by sharply lower palm product prices (with average selling prices of CPO and PK were lower by 17-38% from a year ago).

Downstream performance. Performance of downstream segment improved for the third consecutive quarter (on YoY basis) with an adjusted EBITDA of RM22m (from RM0.4m in 1Q18 and RM2.8m in 4Q18), due mainly to higher offtake at both its biodiesel and refinery operations (which was in turn driven by export sales). On the local front, management shared that the higher biodiesel mandate (from B7 to B10 since Feb-19) has only resulted in a slight increase in biodiesel consumption in Sabah so far.

FFB production growth. FFB output grew by circa 11% during the first 4 months of 2019. Despite the excessive rainfall in Indonesia, management is keeping to its FFB output growth guidance of 10-15% for 2019 (driven mainly by its Indonesia operations), as crop losses resulted from excessive rainfall in Indonesia has been well contained so far.

Forecast. We lower our FY19 core net profit forecast by -8.5% to RM220.7m, mainly to account for lower palm product prices in 1Q19. We maintain our FY20-21 core net profit forecasts for now, pending a further review in our palm oil price assumptions post reporting season.

Maintain HOLD, TP: RM9.50. Maintain SOP-derived TP of RM9.50 and HOLD rating for now, pending further review in our palm oil price assumptions. 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 - 24 May 2019