1H18 CNP* of RM110m is broadly within expectations, at 32% of consensus and 31% of our forecast. Weakness in 2Q18, caused by unfavourable cropping patterns and extended Eid al-Fitr holiday, is seen as temporary. A stronger 2H is expected on lower fertilisation expenses and bumper crop in Indonesia. An interim dividend of 4.8 sen was declared, as expected. No changes to earnings. Maintain OUTPERFORM at unchanged TP of RM10.75.

1H18 broadly in line. Genting Plantations Berhad (GENP) posted 1H18 CNP* of RM110m, which we deem in line with expectations even though it only accounted for 32% of consensus estimate (RM343m) and 31% of our forecast (RM358m). 2Q18’s FFB production was affected by an unusual shift in cropping patterns arising from excessive rainfall, causing a 16% QoQ and 19% YoY drop in Malaysia’s FFB output. This was compounded by reduced harvesting activities amid an extended Eid-al-Fitr holiday. Having said that, we expect a strong earnings comeback in 2H on lower fertilisation expenses and bumper crop in Indonesia. An interim dividend of 4.8 sen was declared, as expected.

Hurt by weak CPO price. YoY, 2Q18 CNP halved to RM37m as FFB growth of 5% to 479k MT failed to offset a 15% decline in CPO price to RM2,291/MT. As a result of the price decline, Upstream’s operating profit plummeted 51% on a 17% revenue contraction. On the other hand, lower feed stock prices and rising discretionary demand for biodiesel helped Downstream to recover from an operating loss of RM0.8m to a profit of RM1.8m. In the Property division, operating profit improved 14% mainly due to higher JV profit from the opening of Genting Highlands Premium Outlets (GPO) in June 2017. QoQ, similarly, CNP halved as Upstream’s operating profit tumbled 57% following a 1% dip in FFB output and a 4% CPO price decline. This was partially cushioned by an improvement in Downstream as noted above. Property’s operating profit was down 25% owing to reduced project billings.

2H comeback. From GENP’s 2Q18 results conference call, management indicated that Indonesia is likely to see a strong seasonal pick-up in FFB production in 2H. In addition, we gather that the group has front-loaded its fertiliser application with c.65% completed up to 1H18, which would improve margins for 2H. We also expect Downstream to perform better as biodiesel volume picks up on increased discretionary blending. We note that biodiesel blending has become profitable at the current level of gasoline-to-palm oil premium (>US$130). Overall, management has guided that earnings should be much stronger in 2H.

No changes in FY18-19E CNP of RM358-434m as results came in within expectations.

Maintain OUTPERFORM with an unchanged TP of RM10.75 based on Sum-of-Parts. Our valuation base year is unchanged at the average of FY18-19E, with Plantations Fwd. PER valued at 23.5x, which reflects the average valuation for large-cap integrated planters. Our TP implies -1.0SD from historical mean, which is below the current large-cap integrated planters’ +0.3SD. We deem this fair as its other non-core divisions deserve a lower PE multiple. We continue to like GENP due to its above-average FY18E FFB growth of 22% vs. industry average of 5%; and stable earnings contribution from GPO and Johor Premium Outlets (JPO) in the form of associate and JV profits. The third phase of JPO is scheduled to be opened by end of 2018, which would boost GENP’s Property performance further in FY19.

Source: Kenanga Research - 29 Aug 2018