GENP’s 1QFY23 results disappointed our as well as consensus expectation on softer-than-expected palm oil prices. FFB output improved YoY but short of expectation. Cost continued to be a  drag on margins and may remain so for another quarter or two.  Downgrade FY23-24F CNP by 41% and 37% but maintain our  MARKET PERFORM and TP of RM5.50 which is supported by 0.9x  P/NTA.

Poor 1QFY23. CNP came in at only 10% of our full-year estimate and  8% of consensus. The weak 1QFY23 CNP of RM35m (-51% QoQ, - 70% YoY) was due essentially to weaker upstream performance. Flat  QoQ CPO price of RM3,585 per MT (though still down 25% YoY) was dampened by poorer QoQ FFB output of 0.456m MT (-14% QoQ, +4%  YoY) while it was the reverse on YoY basis. High CPO cost of about  RM2,960 per MT (+14% QoQ) added fuel to the fire. Downstream margins softened QoQ but did much better YoY while property PBT  generally improved, lifted by better sales and post-Covid Chinese New  Year crowd at its Premium Outlets JV. 1QFY23 ended with net debt of  RM1,093m (21% net gearing). Variance between our CNP forecast and reported NP is small.

CPO price outlook: Range-bound palm oil prices of RM3,500- RM4,000 per MT are expected for 2023, lower than a year ago but relatively firm. Edible oil supply is improving but not as much as  expected at the beginning of the year as record Brazilian soyabean production is helping to cover a very poor Argentinian harvest.  Meanwhile, edible oil demand is recovering on: (a) inventory replenishment as buyers had delayed purchases for a year back due to  high asking prices then, (b) China, the edible oil biggest market, has started reverting to a new post-Covid norm, and (c) demand for biodiesel which is set to grow, led by US, Indonesia and Brazil.

Weaker FY23-24F earnings. We are toning down FY23-24F CPO price from RM3,800 to RM3,600 per MT following the poor 1QFY23  performance. Nevertheless, we should see CNP bottoming out in FY23 then inching up slightly in FY24. Muted 8% YoY organic production growth is likely with sizeable upstream expansion less likely. The group is still in a net debt position and its Indonesian operation can do with further upgrades. Nevertheless, high production cost should stabilise, possibly even ease as fertiliser price, which has corrected sharply since Jan 2023, continue trending down.

Downgrading FY23-24F CNP by 41% and 40%, respectively, but maintaining our MARKET PERFORM and TP of RM5.50. In spite of our aggressive earnings downgrade, we kept the TP intact at RM5.50, at which GENP would be trading at 0.9x P/NTA, slightly below the sector historic P/NTA range of 1-2x. No ESG premium is imputed as we rate  GENP at 3-star (see Page 3). The group’s young estates in Indonesia,  and recovering property earnings are positives, but with ongoing margins pressure, average performing yields and returns with limited growth prospect, we are keeping our Market Perform recommendation.

Risks to our call include: (i) weather impact on edible oil supply, (ii)  unfavourable commodity prices fluctuations, and (iii) production cost inflation.

Source: Kenanga Research - 25 May 2023