GENP’s 1HFY23 results met our expectations but disappointed the market. Its 1HFY23 core net profit plunged 68% YoY as weaker CPO price dwarfed a recovery in FFB output. We see better prospects for GENP in 2H on firmer CPO prices and lower cost. We fine-tune up our FY23-24F net profit forecasts by 5-3%, but keep our TP of RM5.50 (0.9x P/NTA) and MARKET PERFORM call.

GENP’s 1HFY23 core net profit of RM104m (-68% YoY) (excluding RM9m land disposal gains and RM3m of impairment, forex and fair value adjsutments) met our expectations at 48% of our full-year forecast but disappointed the market at only 35% of the full-year consensus estimate. Its 2QFY23 core net profit of RM69m (+98% QoQ, -68% YoY) was underpinned by: (i) a flat quarterly CPO price of RM3,584 per MT, (ii) better FFB output of 0.498m MT in 2QFY23, and (iii) the sales of about RM80m in CPO inventory brought over from the previous quarters. Its upstream operation suffered losses in 2QFY23 while property earnings moderated though stayed commendable as the group’s Premium Outlets continued to perform well with footfall already surpassing pre-pandemic level and earnings approaching so. GENP ended 1HFY23 with net debt of RM1,065m (20% net gearing) compared to RM1,093mn a quarter ago. Disappointingly, GENP cut interim dividend from 15.0 sen a year ago to 8.0 sen for 1HFY23.

Firm CPO price, easier cost. With both edible oil supply and demand improving almost concurrently, it is difficult to foresee a significant inventory build-up until around mid-2024, possibly beyond. Due to this fragile supply-demand dynamics, edible oil prices (including CPO) can swing by more than usual to unexpected developments, such as weather related (eg El Nino) or supply chain disruption (e.g. recently in the Black Sea). Altogether, we are nudging up CPO prices assumption slightly from of RM3,700 per MT to RM3,800 but as half of GENP’s harvest is from Indonesia which suffers lower net prices, GENP should average closer to RM3,600-3,700 per MT over FY23-24F.

FY23 FFB estimate is nudged up by 1% to 2,061K MT in view of the encouraging first half output, which often represent 45%-47% of the entire year’s production. Cost pressures should ease in 2HFY23, from seasonally higher harvest, lower fertiliser and diesel prices. However, cost will remain high in 2HFY23 as GENP catches up with backlog of manuring from last year. Palm kernel (PK) prices are also expected to stay soft for much of FY23 as global economic slowdown dampens demand harder than food-based demand for CPO. PK price has an impact on CPO cost because after PK is sold, proceed is netted off against the cost to produce CPO. The group will also start construction of another Premium Outlet in Jakarta but opening will likely be in FY25.

Forecasts. We fine-tune up our FY23-24F net profit forecasts by 5-3% to reflect firmer CPO prices as well as a softer cost outlook. However, we maintain our MARKET PERFORM and TP of RM5.50 based on 0.9x P/NTA, slightly below the sector historic P/NTA range of 1x-2x. No ESG premium is imputed as we rate GENP at 3-star (see Page 3).

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 - 24 Aug 2023