2Q19 CNP* came in below expectations at RM15.7m (-57% YoY; -67% QoQ), bringing 1H19 CNP to RM62.8m (-43% YoY), forming 29% of consensus full-year estimate and 31% of ours. The disappointment likely stemmed from weaker than-expected FFB growth of 11% vs. our FY19 forecast of 14%. An interim dividend of 3.5 sen was declared, consistent with our expectation. Trim FY19-20E CNP by 19- 14% to RM163-239m. Maintain UP with a lower TP of RM8.80.

Below expectations. Genting Plantations Berhad (GENP)’s 2Q19 core net profit (CNP*) came in below expectations at RM15.7m (-57% YoY; - 67% QoQ). This brought 1H19 CNP to RM62.8m (-43% YoY), accounting for only 29% of consensus full-year estimate and 31% of ours. The disappointment likely stemmed from weaker-than-expected FFB growth of 11% vs. our FY19 forecast of 14%. An interim dividend of 3.5 sen was declared, consistent with our expectation.

YoY, 1H19 Plantation EBIT tumbled 59% to RM67.6m as FFB growth of 11% failed to offset a 16% drop in the average CPO price to RM1,960/MT and a 37% plunge in the average PK price to RM1,194/MT. This was partially cushioned by a solid performance in Downstream segment, which saw EBIT turning from a loss of RM0.5m to a profit of RM29.0m on the back of higher off-take in both its refinery and biodiesel operations. QoQ, 2Q19 Plantation EBIT plummeted 72% to RM14.6m hit by a double whammy of lower FFB output (-7%) and average CPO price (-2% to RM1,934/MT). Additionally, Downstream EBIT halved to RM9.8m as margin moderated to 2.9% from a high base of 4.8% in 1Q19 due to stiffer competition.

Unexciting outlook. Management targets 10-15% FFB growth for FY19 vs. our new assumption of 11%. Our forecast is at the lower-end of the guided range as management insinuated that 4Q19 production in some of its Malaysian estates could be impacted by a dry spell encountered in January and August this year. On CPO prices, despite the recent recovery, we believe further upside is capped by burgeoning stockpiles in 4QCY19 and India’s probe into Malaysian exports of refined palm oil (which, in a grey sky scenario, could lead to protectionism and lower palm oil imports from India). In the Downstream segment, we believe earnings could soften further as feedstock prices recover.

Trim FY19-20E CNP by 19-14% to RM163-239m as we cut our FFB forecasts from 2.37-2.49m MT (+14-5% YoY) to 2.32-2.45m MT (+11- 6% YoY).

Maintain UNDERPERFORM with a lower Target Price of RM8.80 (from RM9.00 previously) based on CY20E PBV of 1.94x (switched from Sum-of-Parts valuation due to earnings volatility), implying -1.0SD given its unexciting outlook. Our TP translates into a CY20E PER of 35.0x due to its low-base earnings. At current price levels, we believe GENP’s valuation is overstretched.

Risks to our call include: (i) higher-than-expected refinery utilisation, (ii) higher-than-expected CPO prices, and (iii) stronger-than-expected property sales.

Source: Kenanga Research - 29 Aug 2019