Genting Plantations’ (GENP) 6M19 core net profit of RM64.7m (-48.6% yoy) came in below our expectations. Higher profit from the downstream manufacturing and property divisions were negated by lower plantation (due to weaker CPO and PK prices) earnings. We cut our 2019-21E core EPS forecasts by 7-21%, mainly to take into account a lower CPO price assumption and higher production costs. As such, our DCF-derived target price has been lowered to RM9.95, maintain HOLD rating.

Weaker Contribution From Upstream Plantation

Genting Plantations’ (GENP) 6M19 revenue was higher at RM1.15bn, up 23.2% yoy, mainly attributable to the higher offtake from the downstream manufacturing (especially biodiesel and refined palm products) and higher sales from property segments but partially dragged by weaker contributions from its upstream plantation (lower CPO average selling prices, which outweighed the increase in FFB production). The blended CPO and PK ASPs for 6M19 were 16.1% yoy and 37.4% yoy lower at RM1,960/MT (6M18: RM2,336/MT) and RM1,194/MT (6M18: RM1,908/MT), respectively, while GENP’s FFB production increased by 10.7% yoy to 1.1m MT. Palm-product selling prices in 6M19 were under pressure partly due to the ample supply of other edible oils in the market, weak market sentiment and the ongoing trade tensions between the US and China. EBITDA margin declined to 17.5% (-9.4 ppt) in 6M19, mainly due to the weaker margin from the upstream plantation division.

6M19 Results Below Expectations

GENP’s PBT for 6M19 also declined by 48.8% yoy to RM85.8m. The lower profits from the upstream plantation division was partially offset by a higher profit contribution from the downstream manufacturing and property divisions. After adjusting for one-off items, GENP’s 6M19 core net profit declined by 48.6% yoy to RM64.7m, accounting for 35% and 31% of our and the consensus 2019 forecast, respectively. This is below our expectation mainly due to a weaker margin, especially from the upstream plantation division.

2Q19 Core Net Profit Down to RM17.5m (-62.9% Qoq)

Sequentially, GENP’s 2Q19 revenue and PBT declined by 15.4% and 56.7% qoq, respectively, to RM525.7m and RM26m. The weaker earnings was attributable to the drop in prices and sales volume from both upstream plantation and downstream manufacturing segments. GENP posted a lower core net profit of RM17.5m in 2Q19, down 62.9% qoq.

Maintain HOLD With a New TP of RM9.95

Given the weaker-than-expected 6M19 results, we cut our 2019-21E core EPS forecasts by 7-21%, mainly to take into lower CPO production and higher production costs. After our earnings forecast revisions, our DCFderived TP has been lowered to RM9.95 (from RM10.00 previously). We maintain our HOLD rating on GENP.

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 government policies.

Source: Affin Hwang Research - 29 Aug 2019