Genting Plantations Berhad (GENP) recorded 1Q18 Core Net Profit (CNP*) of RM73m, coming in within consensus and our forecast at 20%. No dividend was announced, as expected. No change to our FY18-19E CNP forecast at RM358-434m. Upgrade to OUTPERFORM with unchanged TP of RM10.75 based on Sum-of-Parts.

1Q18 within expectations. CNP at RM73m came in within expectations, making up 20% of both consensus’ RM370m forecast and our RM358m forecast, respectively. No dividend was announced, as expected. FFB production at 486k metric tons (MT) was in line at 20% of our forecast. Note that our CNP calculation excludes forex gains (RM13.8m) and government acquisition disposal gains (RM14.4m).

Better production offsets price decline. YoY, 1Q18 CNP declined 4% as upstream core operating profit (ex-land sale) declined 5% to RM101m because both CPO and PK prices declined by 22% and 33%, respectively. This was partly offset by solid FFB production growth of 20% led by maturing and newly acquired area in Indonesia. Downstream continued to see marginal operating loss at RM2m as revenue jumped 124% to RM282m, signaling much higher utilization, which offset weaker selling prices. Property operating profit doubled to RM18m on land sales (RM4.6m) and new contribution from the Genting Premier Outlet (GPO), excluding which Property core operating profit was flat at RM4.5m. QoQ, CNP declined 29% on lower upstream core operating profit (-14%) due to seasonally lower FFB production (-9%) and compounded by lower CPO prices (-8%). Downstream operating profit in 1Q18 at RM4m reversed into losses of RM2m as utilization declined due to lower production volumes. Meanwhile, Property core operating profit was 40% lower on lower earnings recognition.

Production momentum in 2H18. Management in its analysts’ conference call noted that 2Q18 production may see a slowdown due to heavier rains in Indonesia and lower productivity during the fasting months. However, we continue to expect strong FY18E FFB growth of 22% propelled by its new Indonesian acquisition and increasing mature area. This is in line with management estimates of 15-20%. On the downstream segment, as the increase in crude oil prices has been supporting European biodiesel demand, we expect to see better profitability for the segment in the coming quarters. Meanwhile, Property contribution should be higher against last year with full contribution from its new Genting Premium Outlet.

Maintain FY18-19E CNP at RM358-434m as we deem 1Q18 earnings in line with our expectations.

Upgrade to OUTPERFORM with unchanged TP of RM10.75 based on Sum-of-Parts. Our valuation base year is unchanged at average FY18-19E, with Plantations Fwd. PER valued at 23.5x, which reflects the average valuation for large-cap integrated planters. In view of its strong FFB growth prospect and stable Downstream and Property fundamentals, we believe the year-to-date price decline of 8.4% has been overdone, and accordingly upgrade our call on GENP to OUTPERFORM (from MARKET PERFORM).

Risks to our call include: (i) lower-than-expected refinery utilization, (ii) lower-than-expected CPO prices, and (iii) weaker-than-expected property sales.

Source: Kenanga Research - 24 May 2018