1QFY20 CNP of RM74.2m (+57% YoY; +18% QoQ) is deemed below both our/consensus’ estimate at 25%/28%. Management has toned down FY20 FFB guidance to flat, with CPO price view of RM2,200-2,300/MT. We anticipate 2QFY20 earnings to dip as a steep decline in average CPO price (QTD-2QFY20 CPO price: -18%) outweighs FFB recovery. Cut FY20E/FY21E CNP by 33%/22% on lower respective FFB output (-0.7%/4.4%) and CPO price (-10%/- 6%). Downgrade to UNDERPERFORM with lower rolled over SoP derived TP of RM8.05. Current share price implies stretched CY21E PER of 33x (vs. peers’ 28x).

1QFY20 deemed below expectations. Genting Plantations Berhad (GENP)’s 3MFY20 core net profit (CNP) came in at RM74.2m (+57% YoY; +18% QoQ), which we deem below our estimate at 25%, but within consensus’ at 28%. The negative deviation mainly came from lower-than-expected FFB output of 449k MT (-19% YoY; -22% QoQ) accounting for 19% of full-year estimate. In light of an average CPO price decline of 18% (QTD:2QFY20), which is likely to overshadow FFB output recovery in the coming quarter, 1QFY20 should be its best performing quarter, which we had initially expected to account for >25% of full-year estimate. No dividend declared, as expected.

Lifted by upstream. YoY, despite a plunge in FFB output (-19%), due to the lagged adverse weather impact, 1QFY20 CNP leapt (+57%) mainly due to higher average CPO/PK price (+33%/+24%). This resulted in a 35% increase in Plantation EBIT. Downstream performance suffered (-41%) on the back of softer demand for refined palm products. QoQ, 1QFY20 CNP surged (+18%) as higher average CPO/PK prices (+15%/+29%) eclipsed lower FFB output (-22%).

Dim FFB outlook for FY20. Management has toned down FY20 FFB guidance (previously at +5%) to a flat outlook on the back of adverse weather impact on production (especially in Malaysia). Note that Indonesia experienced dry weather conditions in 3Q19 and has not seen a steep drop in output. Meanwhile,1QFY20 CPO production cost rose to c.RM2,000/MT as FFB yield fell and management hopes to drive FY20 cost lower towards FY19’s RM1,850/MT. CPO price is viewed at RM2,200-2,300/MT. We anticipate 2QFY20 earnings to dip as a steep decline in average CPO price (QTD-2QFY20 CPO price: -18%) outweighs FFB recovery.

Cut FY20E/FY21E CNP by 33%/22% as we: (i) reduce FFB output by 6%/7% (implying growth of -0.7%/4.4% vs. 6%/5% previously), and (ii) revised lower our CPO price per MT forecasts to RM2,300/RM2,400, respectively.

Downgrade to UNDERPERFORM with a lower rolled over CY21 SoP-derived Target Price of RM8.05 (from RM8.90). At current price, it implies a stretched CY21E PER of 33x (vs. peers’ average of c.28x). This on the back of a dim FFB outlook and rising production costs as a result of lower yield is unjustified, in our view. Our TP implies CY21E PER of 27x which is more reasonable.

Source: Kenanga Research - 21 May 2020