Genting Plantations Berhad (GENP) 1H16 Core Net Profit (CNP*) of RM73m missed our and consensus forecasts at 30% and 23%, respectively as higher CPO prices (+11%) failed to offset weaker FFB volume (-15%). Property EBIT weakened 34% after the oneoff land sale in 2015. We lower FFB growth to -5% and +11% and lower CNP by 22% and 16%, for FY16 and FY17, respectively, despite tweaking down fertiliser cost. Maintain UNDERPERFORM with SoP-based TP downgraded to RM9.80 (from RM10.60) as we roll forward to FY17 base year.

1H16 misses expectations. 1H16 CNP* at RM73m fell short of expectations at 30% of our RM247m forecast and 23% of consensus’ RM317m forecast. This was largely due to poor FFB volumes (-15% YoY to 644k metric tons(MT)) with Indonesian production suffering from long-term drought effects. Property (-34% to RM28m) on high-base effect as 1H15 saw a one-off land sale at Permaipura for RM40m. An interim dividend of 2.0 sen was announced, below our 8.0 sen full-year forecast. However, we expect a higher dividend announcement 4Q16, in line with previous dividend trends.

Dragged in Indonesia. YoY-Ytd, 1H16 CNP fell 27% as plantation EBIT weakened 25%. Despite 11% higher CPO prices, weaker FFB volume led to higher cost per ton and thinner margins, particularly in Indonesia which had higher costs due to its young average tree age. Property EBIT also weakened 34% on lower land sales. QoQ, 2Q16 CNP improved 5%, largely driven by stronger CPO (+14%) and PK prices (+26%). FFB production was relatively flat (+4%) as slight improvement in Malaysia (+6%) was offset by weaker Indonesian production (-34%). Meanwhile, Property EBIT declined 32% on lower property sales.

Expecting production rebound in 2H16. We gather from management that rainfall patterns have normalised in 2Q16, which bodes well for production recovery. As Indonesian and Sabah's productions are likely to peak in Sep/Oct-16, management believes production should somewhat recover, from a 1H16 decline of 15% to a full-year decline of 5%. With 3Q16 quarter-to-date (QTD) CPO prices at RM2,481/MT (slightly above 1H16’s RM2,444/MT), we think that 2H16 quarterly earnings improvement should be largely volumedriven.

Downgrading FY16-17E CNP by 22-16% to RM192-225m. Despite a brighter 3Q16 outlook, management-guided YoY FFB decline prompts us to cut our FFB growth forecast from 2-15% to -5% and +11% in FY16-17E. After taking into account lower fertiliser cost, we still cut our FY16-17E earnings forecast by 22-16% to RM192-225m.

Maintain UNDERPERFORM with lower TP of RM9.80 (from RM10.60) based on Sum-of-Parts due to the earnings downgrade and rolling forward our valuation base year to FY17E (from average FY16-17E). 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 negative near-term prospects, its maturing Indonesian planted area should contribute to above-average long-run FFB growth (FY17E +11% vs. sector average of +9%). However, we maintain our UNDERPERFORM call as we think the market is yet to price in weak immediate growth prospect and the poor Johor property market outlook.

Source: Kenanga Research - 26 Aug 2016