1H21 core net profit of RM179.1m (+107.1%) beat expectations, accounting for 56.9-63.9% of consensus our full-year estimates, due mainly to higher-than projected realised palm product prices and surprise turnaround at downstream segment during 2Q21. Declared interim DPS of 11 sen (going ex on 9 Sep 2021). Maintain core net profit forecasts and sum-of-parts TP of RM8.61 for now, pending a sector-wide review in our CPO price assumption (with upward bias) post results season. Based on our estimates, every RM100/mt increase in our CPO price assumption will lift our core net profit forecast by circa 9%. Upgrade to BUY (from Hold earlier), as valuation has become more palatable following recent share price underperformance. At RM7.37, the stock is trading at FY21-23 P/E of 21.2x, 22.3x and 20.4x, respectively.

Beat expectations. 2Q21 core net profit of RM120.9m (QoQ: +107.8%; YoY: +883.3%) took 1H21’s sum to RM179.1m (+107.1%). The results beat expectations, accounting for 56.9-63.9% of consensus our full-year estimates, due mainly to higher-than projected realised palm product prices and surprise turnaround at downstream segment during 2Q21.

Exceptional items (EIs) in 1H21. Core net profit of RM179.1m in 1H21 was arrived after adjusting for (i) RM0.9m writeoff and writedown, (ii) RM17m impairment losses at downstream segment, (iii) RM0.2m fair value loss on financial assets, (iv) RM2.2m forex gain, (v) RM12.5m fair value gain on bearer plants, and (vi) RM7.4m deferred tax charge.

Dividend. Declared interim DPS of 11 sen (going ex on 9 Sep 2021 and payable on 24 Sep 2021), translating to dividend payout ratio of ~58.6% (based on reported net profit in 1H21).

QoQ. Core net profit more than doubled to RM120.9m in 2Q21 (from RM58.2m in 1Q21), boosted by crop recovery (+20.9%), higher realised palm product prices, higher sales volume at downstream segment (which has in turn resulted in an earnings turnaround at the segment) and improved property earnings. Despite low utilisation rate, downstream segment turned around, with an adjusted EBITDA of RM24.0m (from - RM5.9m in previous quarter), and this was due mainly to fluctuating raw material prices (particularly, during Jun-21).

YoY. Core net profit surged to RM120.9m in 2Q21 (from RM12.3m SPLY), boosted mainly by a 6.6% increase in FFB production, sharply higher realised palm product prices, improved downstream and property earnings.

YTD. Core net profit more than doubled to RM179.1m in 1H21 (from RM86.5m SPLY), thanks to a 2.6% increase in FFB production, higher realised palm product prices, improved downstream and property earnings, but partly moderated by lower JV contribution (as movement controls have resulted in lower footfall at its premium outlets).

Good performance at downstream segment may not be sustainable. Despite low utilisation rate, downstream segment turned around, with an adjusted EBITDA of RM24.0m in 2Q21 (from -RM5.9m in previous quarter), and this was due mainly to fluctuating raw material prices (particularly, during Jun-21), which allowed GENP to procure its feedstock at lower cost. We believe the good performance achieved in 2Q21 may not sustain into 2H21, as CPO price has been on a steady uptrend since then and operating environment for refinery sub-segment in Malaysia remains challenging (despite the revision in Indonesia’s export levy).

FFB output guidance. Management guided FFB output growth of 3-5% in 2021, as it expects FFB production growth in Indonesia (thanks to additional mature areas and favourable age profile) to more than mitigate lower FFB production in Malaysia operations (as a result of its ongoing replanting programme and protracted lagged impact from previous drought season). In our forecast, we are projecting FFB output growth of 5% (at higher end of management’s guidance).

Forecast. Maintain for now, pending a sector-wide review in our CPO price assumption (with upward bias) post results season. Based on our estimates, every RM100/mt increase in our CPO price assumption will lift our core net profit forecast by circa 9%.

Upgrade to BUY, with unchanged TP of RM8.61. Maintain sum-of-parts TP of RM8.61 (see Figure #2). Upgrade rating to BUY (from Hold earlier), as valuation has become more palatable following recent share price underperformance. At RM7.37, the stock is trading at FY21-23 P/E of 21.2x, 22.3x and 20.4x, respectively

Source: Hong Leong Investment Bank Research - 26 Aug 2021