1Q20 core net profit of RM74.2m (QoQ: +18.5%; YoY: +57.4%) accounted for 43.3% of our full-year estimate. We consider the results within our expectation, as we anticipate earnings to come in lower from 2Q onwards, on the back of lower palm oil prices and lower contribution from downstream segment. Highlights from conference call include (i) Lower FFB output growth guidance (from 5% earlier to flat) on the back of weak FFB output clocked in YTD, (ii) Lower utilisation rate at biodiesel sub-segment from 2Q20 onwards (on the back of non-existence discretionary demand), and (iii) CPO production cost to trend down in subsequent quarters, in anticipation of FFB output recovery. We maintain our FY20-22 core net profit forecasts, SOP-derived TP of RM9.02 and HOLD rating.

Broadly within ours. 1Q20 core net profit of RM74.2m (QoQ: +18.5%; YoY: +57.4%) accounted for 43.3% of our full-year estimate. We consider the results within our expectation, as we anticipate earnings to come in lower from 2Q onwards, on the back of lower palm oil prices and lower contribution from downstream segment. Against consensus, results accounted for 27.6% of consensus (below expectations).

QoQ. 1Q20 core net profit increased by 18.5% to RM74.2m, as lower FFB output (- 4.5%, arising from seasonal effect and impact from temporary suspension of operations in some estates in Sabah), lower property sales, and weaker earnings contribution from premium outlets were more than mitigated by sharply higher palm product prices. During the quarter, ASPs for CPO and PK were 15% and 29.4% higher at RM2,619/tonne and RM1,593/tonne.

YoY. 1Q20 core net profit soared 57.4% to RM74.2m (from RM47.2m a year ago), boosted mainly by significantly higher palm product prices and higher property earnings which more than mitigated a 19% decline in FFB output (dragged mainly by Malaysia operations arising from lagged impact of dry weather conditions in 2019 and temporary suspension of operations in some estates in Sabah).

Downward revision in FY20 FFB output growth guidance. FFB output declined by 16% in 4M20, from the lagged impact of dry weather condition in Malaysia. Despite having anticipated production to play a catch up from May-20 onwards, management shared that it now only expects FFB output to only match last year’s output (vs. 5% growth it guided in Feb-20), given the low FFB output achieved YTD.

Production cost. CPO production cost increased to RM2,000/tonne (from RM1,850/tonne last year), mainly on lower FFB output. Management is hopeful that CPO production cost will trend closer to last year’s level, on the back of FFB production recovery in subsequent months.

Weaker biodiesel sales in subsequent quarters. Despite the less favourable POGO spread, utilisation rate at biodiesel sub-segment remained high in 1Q20 and this was due mainly to contracts locked in last year. Moving into 2Q20, we understand that demand for discretionary purpose has dried up and this will result in significantly lower utilisation rate until and unless POGO reverses.

Forecast. Despite the lower FFB output growth guidance, we are maintaining our FY20-22 core net profit forecasts, as we believe our forecasts have already adequately reflected the weak FFB output prospect in FY20. In our forecast, we are projecting FFB output to decline by 1.5% to 2.29m tonnes in FY20.

Maintain HOLD; TP: RM9.02. We maintain our HOLD rating on GENP, with an unchanged sum-of-parts TP of RM9.02 (see Figure #2)

Source: Hong Leong Investment Bank Research - 21 May 2020