GENP’s Core Net Profit (CNP) of RM115m (-29% QoQ, +91% YoY) for 1QFY22 came in 6% below our expectation and 2% under consensus. Better CPO prices lifted overall earnings as production was weaker QoQ and flattish YoY due to poor weather in its Sabah and Kalimantan estates. Downstream operations also disappointed. Looking ahead, we are expecting CPO price to ease on seasonally higher production in 2H but prices should stay firm on tight global edible oils market. We are revising down FY22 Core EPS by 6% on higher field cost but maintaining FY23 Core EPS on CPO prices staying higher for longer. We are maintaining our OP rating but toning down our TP from RM10.00 to RM9.50.

Below expectations: 1QFY22 CNP was largely underpinned by firm Plantations earnings of RM184m (-25% QoQ, +86% YoY). Robust CPO price of RM4,797/MT (+20% QoQ, +65% YoY) more than offset the weaker FFB output of 0.437m MT (-15% QoQ, -1% YoY). Downstream earnings of RM0.6m (-96% QoQ, -107% YoY) was dampened by tighter refining margins due to softer demand. Biodiesel contributions picked up thanks to local demand but not enough to offset the refining weakness. The Group’s net debt declined marginally by 6% from RM880m (17% net gearing) a quarter ago to RM829m (16% net gearing).

Outlook: The world’s two major vegetable oils, palm and soyabean, should see supply improving seasonally come this 3Q- 4Q. Enough to provide some relief to current tightness but probably not sufficient to reverse the imbalance. The edible oils and fats sector is more likely to see meaningful supply improvement in CY23 or beyond. As such, CPO prices should trend down as 2H approaches but prices is likely to stay elevated on the back of (a) a tight edible oils and fats market which we expect to spill over into CY23 despite decent 2H CY22 harvests and softer demand, (b) China is expected to recommence bigger purchases due to low inventory and gradual reopen and normalization of its economy, and (c) high oil and gas prices will provide some cushion to any sharp drop in edible oil prices by encouraging conversion to biofuels.

We are revising up GENP’s average CPO price from RM4,000/MT for FY22 to RM4,500/MT and from RM3,500/MT for FY23 to RM4,000/MT. Aside from stronger CPO prices, fruit production is expected to improve in FY22 by 5% YoY as the Group’s young Indonesian oil palm estates progressively mature into higher yielding age profile. However, higher production cost is expected to dampen margins moving forward. Management indicated CPO production to cost 15% more on rising wages, fertilizer and transportation costs not forgetting higher exports levy and duties imposed by Indonesia. Another key concern is the shortage of estate workers in Malaysia and its impact on fruit collection. So far, no guest workers have arrived but expectation is for the first batch to come in July or August, barely ahead of the seasonal peak production months.

Maintain OUTPERFORM on the back of maturing oil palm area in Indonesia helping to grow upstream earnings while the ongoing economic recovery should slowly lift property and premium outlets earnings. GENP’s ESG score of 77% is decent. Nevertheless, following our downgrade of FY22 Core EPS by 6% to 59.2 sen, we are toning down the TP from RM10.00 to RM9.50 based on 16x PER.

Risks to our call include: (i) lower-than-expected CPO prices, and (ii) a precipitous and sustained rise in cost.

Source: Kenanga Research - 26 May 2022