9MFY19 CNP came in at RM77.5m (-14% YoY), below our/consensus’ expectations at merely 42%/48%, stemming from: (i) lower-than-expected PK prices (-36%) vs. expected (-23%), and (ii) lower-than-expected FFB output (+9.8%) vs. expected (+11.2%). No dividend was declared, as expected. Cut FY19-20E CNP by 35-27% on lower PK prices and lower FFB forecast. Downgrade to UNDERPERFORM with a lower TP of RM9.65. We think valuations are unattractive at CY20E PBV of 2.4x (vs. peers’ 2.5x), in the face of low ROE (2.8% vs. peers’ 7%) and potential downside risk to Downstream margins.

Below expectations. Genting Plantations Berhad (GENP)’s 3FYQ19 core net profit (CNP*) came in at RM14.7m (-34% YoY; -6% QoQ), bringing 9MFY19 CNP to RM77.5m (-41% YoY), below our/consensus’ estimates at 42%/48%. The disappointment stemmed from: (i) higher- than-expected 9MFY19 CPO production cost of c.RM1,900/MT (vs. our expected RM1,800/MT), (ii) lower-than-expected PK prices of RM1,161/MT (vs. expected RM1,400/MT), and lower-than-expected 9MFY19 FFB output of 1.61m MT (+9.8%) vs. expected (+11.2%). No dividend was declared, as expected.

YoY, 9MFY19 CNP fell (-41%) mainly dragged by lower CPO/PK prices (-12%-36%), overshadowing a 10% increase in FFB output. This caused Plantation EBIT to plunge (-62%) to RM71.2m. The impact was partially cushioned by a solid performance in Downstream segment (+273x, from a very low base of RM0.1m), on the back of higher off- take in both its refinery and biodiesel operations. QoQ, despite 3QFY19 higher FFB output (+6%) and CPO/PK prices (+1%/+1%), CNP fell (- 6%) as: (i) Plantation EBIT plummeted (-75%) on higher fertilizer application during the quarter and higher depreciation (+6%), and (ii) Downstream EBIT (-26%), reflecting softer topline (-23%), due to slower off-take in its refinery and biodiesel operations.

Revising lower FFB guidance. Management expects 4QFY19 FFB to grow QoQ but flattish YoY and is revising for lower FY19 FFB growth target to mid-high single-digit (from 10-15% previously), mainly due to the impact of the dry weather. We gathered that the drop in production is mainly from estates in Peninsular (double-digit decline), bearing the brunt of the dry weather impact, which we believe was also attributed to its older age profile. Having said that, we expect 4QFY19 plantation earnings to improve on the back of higher CPO prices (QTD 4QCY19: +14%), but highlight the risk of Downstream earnings facing pressure due to potential higher feedstock prices.

Cut FY19-20E CNP by 35-27% to RM119-203m as we: (i) lowered our overly optimistic FY19-20E PK prices from RM1,400-1900/MT to RM1,250-1800/MT, and (ii) cut our FFB forecasts from 2.32-2.45m MT (+11-6% YoY) to 2.23-2.33m MT (+7-4% YoY).

Downgrade to UNDERPERFORM (from MARKET PERFORM) with a lower Target Price of RM9.65 (from RM9.80 previously) based on CY20E PBV of 2.15x, implying mean valuation. Our downgrade is grounded on: (i) unattractive valuations, trading at CY20 PBV of 2.4x (vs. peers’ average of 2.5x), despite low ROE of only 2.8% (vs. peers’ average of 7%), (ii) potential downside risk from its Downstream segment from higher feedstock and lower biodiesel discretionary demand from Europe, and (iii) back-to-back earnings miss. Additionally, even on a PER basis, at current price, GENP is trading at CY20E PER of 50x which we think is overstretched.

Source: Kenanga Research - 28 Nov 2019