1HFY22 Core Net Profit (CNP) of RM331m (+80% YoY) came 6% above our forecast but 4% below consensus, accounting for 57% and 53% of respective full-year forecasts. Strong CPO prices and downstream margins in 2QFY22 helped offset soft FFB production, lifting overall 1HFY22 earnings. We are revising up FY22F Core EPS (CEPS) by 6% on better downstream contribution but toning down FY23F CEPS by 3% on higher costs and lower yields. Consequently, we are downgrading our TP from RM9.50 to RM7.50 but keeping our OUTPERFORM recommendation.

2QFY22 CNP did well thanks to a combination of factors such as: (a) stronger plantation earnings from strong CPO price of RM4,907/MT (+2% QoQ, +51% YoY) which helped offset weaker FFB output of 0.493m MT (+13% QoQ, -8% YoY), (b) better downstream performance as better margins compensated for lower volume, and (c) higher property earnings thanks largely to contribution from Premium Outlets which are recovering well.

1HFY22 CNP was underpinned by strong average CPO price of RM4,860/ MT (+57% YoY) even though FFB output was weaker than expected, delivering only 0.930m MT (-4% YoY). Downstream earnings were lifted by better 2QFY22 performance on strong refining margins and better local offtake for biodiesel. Likewise, property segment did better thanks to the recovery its premium outlets as Malaysia gradually lifted travel restrictions and eventually re-opened borders effective April this year. All in all, 1HFY22 results accounted for 57% of our full-year forecast and 53% of consensus. The group ended June 2022 with a net debt of RM829m, with net gearing easing a little from 17% in 1QFY22 to 16%.

Prospect wise, CPO prices have dropped sharply since June, due in part to stronger seasonal 2H supply but also from distressed selling by Indonesia as storage capacity was used up following a temporary export ban in April May. Although YoY growth in edible oils demand is expected to recover as the world resets to a post-Covid normal, so far the recovery has slow, contributing to the recent CPO price weakness. However, 2H 2022 seasonal supply improvement is unlikely to fully alleviate ongoing edible oils tightness. The tightness is more likely to ease only in 2023, possibly even later if demand recovers stronger than expected. As such, we expect CPO prices to hover around RM4,000/MT into 2023 on the back of: (a) global edible oils supply staying fragile, (b) recovering demand as the world progresses towards a new post-Covid normal, and (c) elevated fossil fuel prices are also prompting demand for biofuel.

We are maintaining GENP’s average CPO price at RM4,500/MT for FY22 and for FY23 at RM4,000/MT. However, we are toning down fruit production from a 5% YoY increase in FY22 to 3%. Higher production cost is also expected to dampen margins from rising wages, fertilizer and transportation costs. Labour constraint remains another concern as well as sudden disruptive weather changes as had occurred earlier this year.

With peak CPO prices most probably behind us, GENP’s forward earnings will hinge largely on improving contributions from its Indonesian estates as well as continual recovery from the non-Plantation businesses. Whilst M&A cannot be totally ruled, the group is more likely to focus on improving its plantation operations especially in Indonesia where there is still land issues to be resolved, infrastructure to improve and new mills to build. We are upgrading FY22F CEPS by 6% to 59.2 sen due to better downstream contributions but cutting FY23F by 3% on prospects of higher estates expenditures which has been delayed in FY22 such a manuring. We are also toning down TP from RM9.50 to RM7.50 based on FY23F CEPS against 14x target PER which takes into consideration a 10% discount to larger integrated peer PER of 15x and no premium from its ESG score of 3- star.

Source: Kenanga Research - 25 Aug 2022