GENP’s 1Q20 core net profit of RM74.2m (+57.4% yoy) came in above our expectations. Higher profits from the upstream plantation and property divisions were negated by lower downstream manufacturing earnings. Given the better-than-expected 1Q20 results, we revise upwards our GENP 2020-22E earnings forecasts. Nevertheless, we expect the remaining quarters to be challenging as CPO prices remain under pressure amid concerns over a weak demand outlook and rising stocks in producing countries. Maintain our SELL rating on GENP but raise our DCF-derived target price to RM8.15 as we roll forward our valuation horizon.

Lower Revenue From Plantation and Downstream Manufacturing

Genting Plantations’ (GENP) revenue for 1Q20 was lower at RM569m, down 8.5% yoy, mainly attributable to the lower contribution from the upstream plantation (lower FFB production but was offset by higher palm product prices) and downstream manufacturing divisions (softer demand for refined palm products) but partially offset by higher revenue from its property division. For 1Q20, GENP’s CPO and PK ASPs were higher by 33% and 24% yoy at RM2,619/MT (1Q19: RM1,974/MT) and RM1,593/MT (1Q19: RM1,283/MT), respectively, although GENP’s FFB production declined by 19% yoy to 449.2k MT (attributable to the lagged effect of adverse weather conditions in 2019 and the Movement Control Order). CPO prices rallied in 4Q19 and the early part of January 2020 supported by the outlook of lower production and higher biodiesel mandates; however, the rally has diminished due to the Covid-19 outbreak and a plunge in crude oil prices.

1Q20 Core Net Profit at RM74.2m, Above Expectations

GENP’s EBITDA margin increased to 21.8% (+1.5ppt) in 1Q20, mainly due to better margins from the upstream plantation division. GENP’s PBT for 1Q20 increased by 51.4% yoy to RM90.7m. The higher profits from the upstream plantation and property divisions were partially offset by a lower profit contribution from the downstream manufacturing division. After adjusting for one-off items, GENP’s 1Q20 core net profit was up by 57.4% yoy to RM74.2m, accounting for 58% of our previous 2020 forecast. This was above our expectation mainly due to a higher-than-expected contribution from the upstream plantation division.

Sequentially Stronger, Boosted by Higher CPO and PK Prices

Sequentially, GENP’s 1Q20 revenue declined by 11.6% qoq to RM569m due to lower revenue contributions across the upstream plantation, downstream manufacturing and property divisions. However, 1Q20 PBT and core net profit was higher by 11.8% and 18.5% qoq, respectively, to RM90.7m and RM74.2m. The improvement in qoq earnings was attributable to better margins at the plantation division given the higher CPO and PK prices.

Earnings Forecast and TP Raised, But Maintain Our SELL Rating

Given the better-than-expected 1Q20 results, we raise GENP’s 2020-22E core EPS by 1-6%, mainly to take into account a higher contribution from the plantation division. Nevertheless, we expect earnings in the coming quarters to be more unpredictable due to the Covid-19 pandemic and volatile crude oil prices. We also believe that CPO prices are under pressure amid concerns over lackluster demand and rising stocks in producing countries. We maintain our CPO price assumption for 2020-22E at RM2,100-2,450/MT. After the earnings forecast revisions and rolling forward our valuation horizon, our DCF-derived target price has been raised to RM8.15 (from RM7.50). Maintain our SELL rating as we remain cautious on the plantation sector’s outlook.

Key Risks

The key risks to our SELL rating are: 1) a stronger economic growth leading to a higher consumption of vegetable oils; 2) a sustained rebound in CPO price; 3) higher-than-expected FFB and CPO production; and 4) changes in government policies.

Source: Affin Hwang Research - 22 May 2020