News  Genting Plantations Bhd (GENP) has formed a joint-venture (JV) with Musim Mas Group (Musim Mas) to set up a palm oil refinery in the Palm Oil Industrial Cluster (POIC) in Lahad Datu, Sabah. GENP will own 72% interest in the jointlycontrolled entity Alfa Raya Development Sdn Bhd (Alfa Raya) while Musim Mas will hold the balance 28%.

 We gather that the JV will cost approximately RM300m with a refinery capacity of 600k MT/year and is targeted for completion in 2H16.

Comments  We are neutral on the JV as we expect earnings impact only from FY17 onwards.

 We estimate the cost of the JV to GENP at RM216m. Assuming a 80-20 debt-equity financing structure, we estimate FY15-FY16 costs to be RM100-RM73m debt and RM20m- RM23m cash. Nevertheless, we expect GENP to maintain its net cash position going forward including the JV costs.

Outlook  We are neutral on the plantation sector’s outlook as we expect CPO prices to weaken in 2H15 towards RM2,200/MT due to weak crude oil prices, declining soybean oil prices and a weak Ringgit. However, this could be partially offset by GENP’s good FY15E FFB growth of 11% (higher than sector average of 6%).  Nevertheless, we think GENP’s valuation at 23.3x FY15E PER may suggest that the market has fully priced-in GENP’s near-term growth prospects.

Forecast  No changes.

Rating Maintain UNDERPERFORM  Despite its lower market cap, GENP’s Fwd. PER valuation of 23.3x has exceeded some big-cap planters such as SIME (17.6x Fwd. PER) and KLK (23.2x Fwd. PER). Hence we think that its share price is overvalued.

Valuation  Maintain our Sum-of-Parts based TP of RM9.57 with plantation division valued at 21.0x Fwd. PER. Our 21.0x Fwd PER implies +0.5SD above GENP’s 5-year average PER.

Risks to Our Call  Better-than-expected CPO prices.  Higher-than-expected earnings from property division. 

Source: Kenanga