2Q19 core net profit of RM15.7m (QoQ: -66.8%; YoY: -57.3%) took 1H19 core net profit to RM62.8m (-42.8%). The results came in below expectations, accounting for only 29.3-35.6% of consensus and our full-year forecasts, due mainly to higher-than-expected depreciation charge (at plantation division) and lower than-expected contribution from downstream division. We lower our FY19-20 core net profit forecasts by 16.6% and 4.2%, mainly to account for higher depreciation charge and lower margin assumptions (at the downstream segment). Post earnings revisions; we downgrade our rating to SELL (from Hold) with a lower sum-of-parts TP of RM8.67 (from RM8.97 previously).

Below expectations. 2Q19 core net profit of RM15.7m (QoQ: -66.8%; YoY: -57.3%) took 1H19 core net profit to RM62.8m (-42.8%). The results came in below expectations, accounting for only 28.4-35.6% of consensus and our full-year forecasts. Higher-than-expected depreciation charge (at plantation division) and lower-than-expected contribution from downstream division were the key variances against our forecast.

Dividend. Declared interim DPS of 3.5 sen (ex-date: 17 Sep 2019). For the full-year, we are projecting a total DPS of 12 sen, translating to a dividend yield of 1.2%.

QoQ. 2Q19 core net profit fell by 66.8% to RM15.7m, dragged mainly by seasonally lower FFB production, lower palm product prices (in particularly, PK prices, which fell by 15.7%) and lower downstream earnings (arising from lower margins).

YoY. 2Q19 core net profit fell by 57.3% to RM15.7m, as higher FFB production and downstream earnings were more than offset by lower palm product prices (CPO: - 15.2%; PK: 37.2%).

YTD. 1H19 core net profit declined by 42.8% to RM62.8m, dragged mainly by sharply lower palm product prices (CPO: -16.1%; PK: -37.4%), but partly mitigated by higher FFB production (+10.8%), improved contribution from downstream (thanks to higher offtake at both its biodiesel and refinery operations) and property segments, as well as premium outlets.

FFB production. FFB production rose by 10.8% to 1.07m tonnes in 1H19, due mainly yield recovery in Malaysia estates and young age profile in Indonesia estates. While management is keeping its FFB production growth guidance of 10-15% in FY19, it cautioned that such guidance may not hold as dry weather condition in Aug may impact FFB contribution from Malaysia estates in 4Q19. For now, we are still keeping to our FFB production growth forecast of 11.8% in FY19.

Downstream performance. While the utilisation rates should sustain into 2H (backed by increased biodiesel mandate in Malaysia and locked in sales for discretionary blending) management shared that profitability at the segment will likely weaken in 2H, due mainly to narrowed refining margins.

Forecast. We lower our FY19-20 core net profit forecasts by 16.6% and 4.2%, mainly to account for higher depreciation charge and lower margin assumptions (at the downstream segment). Our FY21 core net profit forecast, however, remains largely unchanged.

Downgrade to SELL, TP: RM8.67. Following the downward revision in our core net profit forecasts, we lower our sum-of-parts TP on GENP by 3.4% to RM8.67. We downgrade our rating on the stock to SELL (from Hold), as valuations have become lofty following recent share price run-up and earnings cut.

Source: Hong Leong Investment Bank Research - 29 Aug 2019