Genting Plantations (GENP)’ 9M16 CNP at RM168m came in within consensus’ RM237m and above our RM206m forecast at 71% and 81%, respectively. This was largely due to better margins on higher prices and production volume. No dividend declared, as expected. We upgrade FY16-17E CNP by 17-15% to RM241-259m, while our SoP-based TP is increased to RM10.62 (from RM9.80). However, our UNDERPERFORM call is maintained due to rich valuations.

9M16 within consensus; above our expectations. 9M16 Core Net Profit (CNP*) of RM168m met consensus’ RM237m forecast at 71%, while beating our RM206m forecast at 81%. This was largely on CPO price improvement (+18% YoY) while YoY FFB volume decline lessened to -12% (from -15% as of 1H16). No dividend was announced, as expected.

Plantation rebound. YoY, CNP rose 18% driven by better Plantation EBIT (+28%) as better CPO prices (+18%) offset weaker volumes (- 12%). Property earnings continued to weaken (-26%) on lower one-off property sales and softer demand. Other segments’ losses were also lower (-58%) on lower R&D cost and favourable forex movements.

QoQ, CNP jumped 160% as Plantation EBIT rose 166% on stable CPO prices (+1%) amid FFB volume recovery (+33%). Property sales improved (+38%) on better sales volume and a one-off land sale for RM9m.

Medium-term margin risk. We are bearish in the medium-term for its Downstream operations. GENP’s upcoming refinery is slated for commissioning in early 1Q17 and we expect some margin volatility and potential start-up losses in 1H17 as GENP ramps up its utilization while incurring higher depreciation charges. On the Upstream side, we are positive in the short-term. Management expects sequential growth in 4Q16, with better recovery in its Indonesian plantations due to younger tree age and more favourable weather, as well as a later seasonal peak period in Kalimantan. With quarter-to-date CPO prices holding at +6% QoQ and +29% YoY, we expect to see positive Upstream results in 4Q16. However, Property outlook is likely to remain subdued due to the soft market environment in Johor.

Upgrade FY16-17E CNP by 18-10% to RM241-259m as we trim our unit cost assumptions to better reflect the economies of scale due to higher production volume. However, FY17E earnings are moderated by Downstream margin risk.

Maintain UNDERPERFORM with higher TP of 10.62 (from RM9.80) post earnings upgrade. In our Sum-of-Parts valuation, our Plantation target PER is maintained at 26.0x, which is in line with mean valuation of GENP’s 3-year average PER. We believe this is fair as GENP’s above-average FY17E FFB growth prospect (15% against peers’ 10%) is offset by potential volatility in downstream businesses and weak Property prospects in Johor. Despite a higher TP, we reiterate our UNDERPERFORM call as valuations appear rich at a Fwd. FY17E PER of 31.8x, compared to other big-cap plantation counters which fetch Fwd. PERs of 21-22x. Furthermore, we expect a weak 1H17 as its upcoming refinery could see start-up losses in the Downstream segment.

Source: Kenanga Research - 24 Nov 2016