We reaffirm our less positive view on GENP’s near term earnings prospects, as FFB output growth, decent earnings contribution from downstream operations and premium outlets are insufficient to mitigate depressed CPO prices, higher CPO production costs, and lower property development earnings. We lower our FY19-21 core net profit forecasts by 9.8-15.4%, largely to account for higher CPO production cost, lower property development earnings and higher finance cost assumptions. Post earnings forecast revisions; we maintain our HOLD rating with a lower SOP-derived TP of RM8.97 (from RM9.23 previously).

Our recent meeting with Genting Plantations’ (GENP) management reaffirms our less positive view its near term earnings prospects, as FFB output growth, decent earnings contribution from downstream operations and premium outlets are insufficient to mitigate depressed CPO prices and higher production cost.

Decent FFB output growth in 1H19 to sustain into 2H19, but insufficient to cushion plantation earnings. We expect the 10.8% FFB output growth achieved in 1H19 to sustain into 2H19 (if not better), underpinned by an expected 4,000ha of planted landbank in Indonesia moving into mature bracket in FY19. However, higher FFB output and JV earnings are insufficient to cushion GENP’s earnings from low CPO price (which has fallen by ~5% YTD) and higher production cost (arising from higher labour and fertiliser costs).

Slower property development earnings in FY19... Despite the improvement in property sentiment in Kulai (in particular, GENP’s flagship project in Genting Indahpura) since GE14, the property development division will likely register weaker EBITDA in FY19, as the decent performance registered in FY18 was partly driven by its efforts in marketing its inventories of properties and expediting of construction works on ongoing projects.

…but earnings contributions from 2 premium outlets to improve further. We believe earnings contribution from JVs (which is derived mainly from Johor Premium Outlets and Genting Highland Premium Outlets) will expand further into FY19-20, underpinned by a 16.8% increase (or 45,000 sqft) increase in let lettable area (NLA) in Johor Premium Outlets since end-1Q19 and the introduction of more premium brand outlets (such as Prada and Bottega Veneta) at JPO.

Downstream utilisation rate to remain high. Favourable refining margin, widened POGO spread since 2H18 (see Figure #2) and increased biodiesel mandate (from B7 to B10) have resulted in downstream division’s adjusted EBITDA multiplying to RM21.9m in 1Q19 (from RM0.4m and RM2.8m in 1Q18 and 4Q18, see Figure 3). While profitability at the division may remain volatile (due to timing differences), we believe high palm oil-gas oil (POGO) spread and increased biodiesel mandate in Malaysia (from B7 to B10) will continue to drive utilisation rates at GENP’s downstream operations, hence bringing decent earnings to GENP.

Forecast. We lower our FY19-21 core net profit forecasts by 15.4%, 11.7% and 9.8%, to reflect higher CPO production cost, lower property development earnings and higher finance cost assumptions.

Maintain HOLD with lower TP of RM8.97. We lower our SOP-derived TP to RM8.97 (from RM9.23 previously) following the downward revision in our core net profit forecasts. While we like GENP for its young age profile (which in turn translates to above-average FFB production growth), downstream exposure and healthy balance sheet, we believe near-term upside on the stock is capped by current low CPO price environment. Hence, we are maintaining our HOLD rating on GENP.

Source: Hong Leong Investment Bank Research - 6 Aug 2019