GENP’s 9M18 core net profit of RM134.2m (-42.2% yoy) only accounted for 42% and 47% of our and consensus 2018 core EPS forecasts respectively. The upstream plantation profit was lower yoy, while property and downstream manufacturing profits increased. Due to weakness in CPO prices as well as our higher production cost assumptions, we cut our 2018-20E core EPS forecasts by 34-46%. Given the earnings cut and despite a higher target PER of 33x (based on GENP’s 5-year mean) applied to our 2019E core EPS, we lower our TP to RM9.76. With upside potential of only 1% to our new TP, we downgrade GENP to a HOLD rating from Buy.

9M18 Results Below Expectations

Genting Plantations (GENP) reported higher 9M18 revenue by 11% yoy to RM1.4bn. This was mainly attributable to higher offtake from the downstream manufacturing segment coupled with higher property sales, but partially offset by the weaker contribution from its upstream plantation segment. The blended CPO and PK ASPs for 9M18 was lower yoy at RM2,235/MT (9M17: RM2,770/MT) and RM1,812/MT (9M17: RM2,404/MT), respectively, while GENP’s FFB production increased by 9% yoy to 1.5m MT. However, PBT for 9M18 declined by 39.5% yoy to RM192.9m due to lower profit from the upstream plantation division, but was partially offset by higher profit contributions from the property and downstream manufacturing divisions. After adjusting for one-off items, which includes forex losses and gains from the acquisition of land by the government, 9M18 core net profit declined by 42.2% yoy to RM134.2m, accounting for 42.2% and 46.7% of our and consensus 2018 forecasts, respectively. This is below our expectation mainly due to weaker profit margins, especially from the upstream plantation division.

Weaker Core Net Profit Sequentially

On a sequential basis, GENP’s 3Q18 revenue was higher at RM488.8m (+21.4% qoq) while PBT plunged 32.6% qoq to RM25.1m. The drop in profit for 3Q18 was mainly due to a lower contribution from the upstream plantation given the decline in CPO prices. GENP’s 3Q18 core net profit declined by 33.8% qoq to RM24.3m.

Downgrade to HOLD with lower TP of RM9.76

Due to weakness in CPO prices as well as our higher production cost assumptions mainly attributable to the higher minimum wage in Malaysia, we cut our 2018-20E core EPS forecasts by 34-46%. Given the earnings forecast revisions and despite a higher target PER of 33x (based on GENP’s 5-year mean; previously 22x based on the sector’s earlier 2019E average PER) applied to our 2019E core EPS, we lower our 12-month TP to RM9.76. Based on valuation, we downgrade GENP to a HOLD rating (upside of 1.1% to our latest TP) from Buy.

Key Risks

Key upside/downside risks include: 1) a stronger/weaker economic growth leading to a higher/lower consumption of vegetable oils; 2) a sustained rebound/plunge in the CPO price; 3) higher-/lower-than-expected FFB and CPO production; and 4) changes in policies.

Source: Affin Hwang Research - 30 Nov 2018