Genting Plantations Berhad (GENP) 3M16 Core Net Profit (CNP*) of RM36m missed our and consensus forecasts at 12% and 11%, respectively. Flat CPO prices (+1% YoY) and higher PK prices (+7%) failed to offset lower FFB volume (-11%). Meanwhile Property EBIT fell 52% after the previous year’s one-off land sale. We cut FFB growth and Property sales estimates for both FY16E and FY17E by 18% each. Maintain UNDERPERFORM with lower TP at RM10.60 (prev. RM11.30) based on SoP.

Missed expectations. CNP at RM36m missed expectations, making up 12% of our forecast (RM310m) and 11% of consensus forecast (RM317m). Flat CPO prices (+1% year-on-year (YoY) to RM2,273/metric ton (MT)) and higher PK prices (+7% to RM1,866/MT) failed to offset weaker FFB volume (-11% to 315k MT) due to lagged drought impact. Property earnings were also weaker (-52% to RM17m) on high-base effect as 1Q15 saw a one-off land sale at Permaipura for RM40m.

Hit by drought. GENP CNP fell 44% both YoY and quarter-on-quarter (QoQ), as plantation EBIT declined 27% YoY and 29% QoQ mainly on weaker volume from regional droughts in 2014/15. Volatile weather from El Nino continued in 1Q16 as some low-lying Indonesian area saw collection disrupted by flooding from heavy rains, but Sabah and Northern Peninsular Malaysia turned drier towards March. Property segment’s EBIT was weaker at -52% YoY on lower one-offs, and -16% QoQ on lower property sales.

Weaker FFB growth prospect. Management mentioned that due to higherthan- expected 1Q16 production setbacks and active replanting efforts, they expect negative FY16 FFB growth in Malaysia, and less-aggressive FFB growth in Indonesia. As a result, we cut our group FY16E/FY17E FFB growth targets to flat and +15% (from +9/+15% previously). While we expect 2Q16 earnings to improve YoY, this will likely come from CPO price appreciation, as FFB growth could be flat against 2Q15.

Cut FY16-17E CNP by 18-18% to RM254-274m. We reduce FFB growth assumptions as outlined above and trim Property sales growth assumptions to account for lower unit launches (-12%) as mentioned by management.

Maintain UNDERPERFORM with lower TP of RM10.60 based on Sum-of- Parts as we roll forward our valuation base year to 1H17 (from FY16). Our Plantation Target PER is maintained at 26.0x, in line with mean valuation on GENP’s 3-year average PER. We think this is fair. Despite flat near-term prospects, its young Indonesian planted area should contribute to positive long-term FFB growth. However, we maintain our UNDERPERFORM call given weak short-term prospect and a lacklustre Johor property market outlook.

Source: Kenanga Research - 24 May 2016