We came away from a meeting with GENP reassured of its near- term upstream outlook which will overshadow a weak downstream. Despite aggressive replanting in Malaysia, FY21E FFB growth is guided at 3-5% (vs. our 5% forecast) driven by Indonesia. M&A opportunities are on the cards with a war chest of ~RM800m, while an economic reopening together with the new theme park will benefit its premium outlets. After >30% YTD share price decline, valuations could have undershot on the downside. Maintain OUTPERFORM with a rolled-over SoP-TP of RM7.65 (-1.5SD). ESG score is at 77%.

Production growth driven by Indonesia. Despite its replanting activities in Malaysia (estimated at 4k Ha), management is maintaining its commendable FY21 production growth guidance at 3-5% (in line with our FY21 forecast of 5%). Growth will be driven by its Indonesian trees’ young age profile, which we estimate at c.9-10 years. Peak production is expected in 4QFY21 (Oct- Nov), which deviates slightly from the usual Sep-Oct peak. The impact of labour shortage (<5% short) remains manageable with on-going initiatives to hire locally, and alleviated by smaller planted Ha (replanting 4k Ha). There were also no COVID-19 outbreaks in GENP’s estates.

Stronger upstream to overshadow weak downstream. With a wide POGO spread of ~USD450/MT (vs. 3-year average of ~USD150/MT), we expect downstream to remain challenging. However, the weak downstream will be overshadowed by stronger upstream. While the view is that prices are likely to remain elevated when compared to 2020 (~RM2,800/MT), there are more downside risks than upside to current CPO prices. We understand the group has sold forward ~20% of FY21 production, although at an undisclosed price. Management hopes to keep FY21 cost of production below FY20’s level of ~RM1,800/MT on production growth (vs. our ~RM1,900/MT). We think production cost could creep up on higher fertilizer cost (~10%) and potentially higher fertilizer application rate in 2Q-3QFY21 given lower application in 1QFY21 (~15%) due to wet weather.

M&A opportunities on the cards. GENP is open to M&A possibilities and do receive proposals from time to time. Given that the group is sitting on a still- growing war chest of ~RM800m, we think M&A opportunities to boost planted area and production growth could be found. We think the group is more likely to be interested in estates in South Kalimantan where its Indonesian estates are concentrated. GENP’s latest upstream acquisition in 2017 was also in South Kalimantan, at an EV/planted Ha of ~RM65k. On the ESG-front, GENP’s improvements include greater disclosure for its Indonesia division, such as traceability and land area under sustainable certification.

Keep FY21-22E CNP unchanged as updates are consistent with expectations. Maintain OUTPERFORM with rolled-over FY22E TP of RM7.65 based on Sum- of-Parts. While we roll over valuations, we ascribed 10% and 20% lower valuations to its upstream and downstream divisions due to ESG concerns. Our TP remains unchanged and implies -1.5SD from mean. That said, after YTD-decline of >30%, and with a reopening angle in the form of premium outlets, we think valuations (at -1.75SD from mean) could have undershot on the downside. On a PBV-basis, GENP is valued at ~1.1x which at a discount to ESG-laden FGV. Strong footfall from the eventual new Genting theme park could also be a catalyst. ESG score is at 77%.

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

Source: Kenanga Research - 4 Aug 2021