9M18 CNP* of RM132m came in below consensus at 46%, and our forecast at 52%, largely due to lower-than-expected CPO price. No dividend was declared this quarter as usual, but we trim FY18-19E dividends, nonetheless, from 17.0-28.0 sen to 11.0-27.0 sen in tandem with our earnings cut. Trim FY18-19E CNP by 36-3% to RM161-410m as we cut FFB by 2- 1% and FY18E CPO price by 7%. Maintain OUTPERFORM with a lower TP of RM10.50 (from RM10.80).

Below expectations. Genting Plantations Berhad (GENP)’s 9M18 CNP* of RM132m came in below consensus estimate (RM288m) at 46% and our forecast (RM252m) at 52%, largely attributable to lower- than-expected CPO price realised (RM2,235/MT vs. our assumption of RM2,300/MT). 9M18 FFB output of 1.47m MT also missed our full-year forecast of 2.16m MT (+15% YoY) at 68%. As usual, no dividend was declared this quarter, but we trim FY18-19E dividends, nonetheless, from 17.0-28.0 sen to 11.0-27.0 sen in tandem with our earnings cut.

CPO price – the culprit. YoY, 9M18 CNP tumbled 43% as FFB growth of 9% failed to offset a 19% decline in CPO price realised. As a result, upstream Plantation’s operating profit plummeted 40% on a 17% revenue contraction. On the other hand, cheaper feedstock and rising discretionary demand for biodiesel brought about Downstream’s turnaround, recording a borderline operating profit of RM132k vs. a loss of RM3.9m. In the Property division, operating profit jumped 73% on higher sales from the recent launches of its Indahpura project as well as higher JV profit from the opening of Genting Highlands Premium Outlets (GPO) in June 2017. QoQ, despite 5% growth in FFB output, CNP plunged 39% as CPO prices declined 11%. Downstream operating profit was also lower by RM1.1m (-64%) on weaker margins (0.3% vs. 0.9%) as a delay in delivery resulted in lower biodiesel exports. These were partially offset by a better performance in Property due to Indahpura launches as noted.

Production pickup to lift 4Q. In 4Q18, we expect a strong seasonal production pickup to outweigh declining CPO prices and lift earnings growth sequentially. In addition, from GENP’s conference call, we learned that the group has completed its fertiliser programme in 3Q18, which should support margins in 4Q18. However, these will likely be dampened by a poorer performance in Property as management does not anticipate any property launches in 4Q18. In addition, while we expect Downstream to record higher sales on increased feedstock supply and biodiesel delivery spillover from 3Q18, both margin and profit are likely to deteriorate as lower crude oil prices make downstream plantation products less competitive.

Trim FY18-19E CNP by 36-3% to RM161-410m as we cut our FFB forecasts by 2-1% from 2.16-2.39m MT (+15-11% YoY) to 2.11-2.37m MT (+12-12% YoY), while lowering our FY18E CPO price assumption by 7% from RM2,300/MT to RM2,150/MT.

Maintain OUTPERFORM with a lower TP of RM10.50 (from RM10.80) based on Sum-of-Parts, implying -1.0SD below mean. Our valuation base year is unchanged at FY19E, with Plantations Fwd. PER valued at 21.9x, which reflects its FY19E FFB growth prospects of 12% and its mid-large cap status. The first quarter of earnings disappointment since 2Q16. The company appears undervalued as it is currently trading at the -2.0SD levels considering its above-average CY19E FFB growth of 12% 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 commenced operations in November 2018, which would boost GENP’s Property performance further in FY19.

Source: Kenanga Research - 30 Nov 2018