Period  2Q14/1H14

Actual vs. Expectations Genting Plantation (GENP)’s 1H14 core net profit* (CNP) of RM167m is below consensus as it makes up only 44% of consensus forecast (RM379m). However, it is within our estimate at 53% of our RM312m forecast. We believe that consensus may have overestimated property division’s earnings which actually declined 15% YoY to RM39m in 1H14.

 Note that we have excluded forex gain of RM3m in our 1H14 CNP calculations. As for 1H13, the one-off charity donation of RM35m and forex loss of RM5m is excluded.

Dividends  As expected, a 3.0 sen dividend was announced. We expect another final dividend of 7.3 sen to make up full year FY14 dividend of 10.3 sen, implying 1.0% dividend yield.

Key Results Highlights YoY, 1H14 CNP increased 32% to RM167m due to strong core EBIT growth from plantation division (+70% to RM206m) which has benefited from higher CPO prices of RM2619/MT (13% YoY). Despite strong 70% growth in plantation division, the Group’s overall growth is capped at 32% due to lower core EBIT from property division (-15% to RM39m) which registered lower revenue in the absence of sizable land sales. We estimated that 1H14 plantation core EBIT was RM206m after excluding forex gains of RM3m. 1H13 core EBIT was RM121m after excluding the one-off charity donation of RM35m and forex losses of RM5m.

 QoQ, 2Q14 CNP was up 5% to RM86m due to higher core EBIT in plantation division (+20% to RM112m). We believe that the plantation division has sold some inventories from 1Q14 production as its inventory was lower QoQ, hence better earnings despite the flattish CPO prices. We estimate that 2Q14 plantation core EBIT was RM112m (after excluding forex losses of RM17m) as opposed to RM94m (after excluding forex gains of RM20m) in 1Q14.

Outlook  Management mentioned that 2H14 earnings prospect depends on CPO prices. In our view, 2H14 earnings may be affected significantly if CPO prices stay below RM2100/MT for an extended period.

Change to Forecasts Maintain FY14E-FY15E CNP of RM312m-RM316m.

Rating Maintain UNDERPERFORM

Despite its lower market cap, GENP’s Fwd. PE valuation of 24.5x has exceeded some big cap planters such as IOICORP (20.9x Fwd. PE) and KLK (19.5x Fwd. PE). Hence, we believe that its share price is overvalued. Long-term earnings growth may be affected after 5 years due to potential limit by Indonesia on foreign ownership of plantation land there. We have recently reduced our TP to RM9.55 (from RM9.70) to incorporate this risk (Refer to Sector Update on 25-Aug-2014).

Valuation  Maintain our Target Price to RM9.55 based on Sum-Of-Parts.

Risks to Our Call Better-than-expected CPO prices.

 Higher-than-expected earnings from property division.

Source: Kenanga