We visited GENP’s model estate (Genting Indah Estate) and award-winning oil mill (Genting Indah Oil Mill), situated in the Tongod region of Sandakan, Sabah. We were impressed with the management and the efficiency of the estates and mills. The group targets to achieve full mechanisation by 2020. Trim FY18E CNP by 19% to RM252m after reducing FFB estimate from 2.30m MT to 2.16m MT but maintain FY19E CNP of RM423m as existing FFB forecast of 2.39m MT (+11%) appears achievable. Maintain OUTPERFORM with an unchanged TP of RM10.80.

Impressed with Genting Indah Estate and Oil Mill. We visited Genting Plantations (GENP)’s Genting Indah Estate (GIDE – regarded as the group’s model estate) and award-winning Genting Indah Oil Mill (GIOM), situated in the Tongod region of Sandakan, Sabah. During the visit, we were accompanied by En. Abdul Rahim Wilson - General Manager, Mr.Lau Aik Leong - Senior Estate Manager, Mr.James Lau - IR, Ms. Tan May Yee - IR, and a big group of other assistant and estate managers. We were impressed with the management and the efficiency of the estates and mills.

Targets full mechanisation by 2020. GIDE’s infield FFB collection and evacuation processes are mostly mechanised – using mechanical equipment to load harvested FFB and subsequently carry and evacuate them onto a designated platform. There are currently 6 three-wheeler farm machines (BADANG), 6 buffalos, and 12 motorised wheelbarrows (SEMUT). From GENP’s study, these equipment can increase average productivity per harvester to 2-4MT of FFB/day from 1.5MT using a traditional wheelbarrow. The group also has 5 Grabbers for platform collection, and aims to fully mechanise its platform collection by 2020.

Peak output seen in December. Management expects the Tongod region to achieve FFB production of 3.30MT/ha in November (+10% from 2.99MT/ha in October), and peak at 3.5MT/ha in December. This is not surprising as the region used to achieve 4MT/ha in a month. Tongod region consists of three estates, namely GIDE, Genting Permai Estate and Genting Kencana Estate, with an aggregate planted area of 7.4k Ha (c.5% of GENP’s total planted area). From what we have gathered, the group’s FFB production could peak in December as well. On a negative note, management guided FFB growth of 15% in FY18, which is markedly below our current forecast of 22%.

Trim FY18E CNP by 19% to RM252m as we cut our FFB estimate from 2.30m MT to 2.16m MT (+15% YoY). However, we maintain our FY19E CNP of RM423m as our existing FFB forecast of 2.39m MT (+11%) appears achievable. GENP targets to release its 3Q18 results on 29 Nov 2018.

Maintain OUTPERFORM with an unchanged TP of RM10.80 based on Sum-of-Parts. Our valuation base year is unchanged at FY19E, with Plantations Fwd. PER valued at 21.9x, which reflects its FY19E FFB growth prospects of 11% and its mid-large cap status. Our TP implies - 1.0SD below the mean. The company appears undervalued as it is currently trading at the -2.0SD level. We continue to like GENP for its above-average CY19E FFB growth of 11% 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.

Risks to our call include: (i) lower-than-expected refinery utilisation, (ii) lower-than-expected CPO prices, and (iii) a precipitous rise in labour/fertiliser/transport and other costs.

Source: Kenanga Research - 19 Nov 2018