We met with GENP’s Mr Lee Ser Wor (SVP – Corporate & Finance) and team, and came away with better confidence in short-term production prospect and increased growth expectations for 2017. However, 1Q17 may still see headwinds on refinery start-up losses while its Property segment’s prospect is overall neutral. All in, we up our FY16-17E CNP by 5-17%. Accordingly, we also up our SoP-based TP to RM12.40 and call to MARKET PERFORM.

Kalimantan production boost. We understand that Genting Plantations Berhad (GENP)’s 2016 production declined 7% to 1.61m metric tons (MT), whereby Malaysian production fell 12% due to replanting and delayed drought impact, but was partly offset by a 9% improvement in Kalimantan driven by maturing area of c.3.2k hectares (ha). Looking ahead, we think Kalimantan should see another boost in 2017 on yield recovery and substantial maturing area of 7.0-8.0k ha, while Malaysia will see moderate improvement due to replanting of 1.0-2.0k ha. Nevertheless, the high maturing area prompts us to up our FY17E FFB growth from 15% to 18%, brightening the Plantation segment’s upstream outlook in conjunction with highly supportive CPO prices (year-to-date (YtD) RM3,280/MT).

Downstream in early days. Management noted that its 600k MT capacity refinery (a 72%-28% JV with Musim Mas Group) started operations in Jan 2017. We understand that GENP plans to fill the capacity with its Sabah production (c.250k MT), but expect more purchases of external CPO to achieve optimal utilisation of >60%. Meanwhile, plans for its metathesis plant are still being finalised and we understand the conversion of its existing biodiesel plant may take up to two years for completion once approved. With the refinery still in gestation period and a fairly long horizon on the bio-refinery plant, we expect limited earnings contribution from this segment in 1H17.

Property outlook neutral overall as we expect weak property development progress to be offset by potential retail growth. The Johor property market continued to soften in 2016, with c.RM100m sales value (compared to c.RM150m in FY15, ex-land sales). Going forward, although we believe property launches could remain muted, management did not rule out land divestments as a way to unlock value in its land banks. However, its retail businesses should see some upside on the opening of the Genting Premium Outlets (GPO) slated for 1Q17. We gather that both the GPO and Johor Premium Outlets (JPO) have a similar net lettable area (NLA) of 270-280k sq ft. With the JPO yielding annual profits of c.RM20m, we expect a similar boost from the GPO once it is up and running.

FY16-17E CNP increased by 5-17% to RM265-313m as we increase our FY17E FFB growth forecast to 18% (from 15%) while updating our FY16-17E PK price assumptions. We also impute additional earnings contribution from GPO on the Property segment.

Upgrade GENP to MARKET PERFORM with higher TP of RM12.40. In line with the earnings increase, we upgrade our Sum-of- Parts (SoP)-based TP to RM12.40 (from RM10.90). We are positive on the Plantation upstream earnings growth potential, especially considering the substantial maturing hectarage in 2017. The opening of the GPO could also provide a boost to the lacklustre property segment, especially in late 1Q17-2Q17. However, we expect headwinds from the newly started refinery especially in its gestation period, which could lead to losses in the downstream segment. Our overall neutral outlook on GENP leads us to revise our call to MARKET PERFORM (from UNDERPERFORM).

Source: Kenanga Research - 13 Feb 2017