GENP should see stronger 2HFY24 earnings after a dismal 2Q performance. From our previous expectation that FFB harvest was to stay flat, it is already improving seasonally dovetailing with CPO price likely to stay firm and costs relatively contained. Contribution from the group's maiden Premium Outlets in Jakarta is also expected to be higher on larger lettable area. FY24-25F earnings forecasts are revised up by 3% and 9%, respectively, TP is raised by 13% to RM6.00 (from RM5.30) and upgrade our UNDERPERFORM call to OUTPERFORM. GENP's earnings are among the more sensitive to CPO prices among peers.

Better FFB yields ahead. After suffering from poor FFB output in the first half, FFB yield stayed poor in July but turned around MoM in Aug with a monthly fruit production of 0.189m MT (+21% MoM, -3% YoY). We expect FFB harvest to continue inching up MoM into Sept and Oct, possibly extending into Nov of this year. As such, 2H harvest should be 20-25% higher than 1H, thanks to an upcycle in biological yields but not enough to nudge full-year FY24 FFB output to surpass meaningfully that of FY23. As such, we expect FY24 FFB harvest to stay flattish YoY at around 2.1m MT but yields are expected to recover further in FY25 as the group's Indonesian estates mature into higher yielding age brackets.

Firm CPO prices to stay. Due to seasonally higher harvest, 3Q CPO prices are typically weaker, averaging 8% below 2Q prices historically. However, thus far, average 3Q MPOB CPO price of RM3,989 per MT has been essentially flat (-1% QoQ) despite a stronger MYR (+5% QoQ). Importantly, CPO price is likely to stay firm in CY25 as tight supply is likely to cause global edible oil inventory levels to moderate in CY25. Meanwhile, costs are expected to stay supportive of upstream margins.

Higher Jakarta's outlet contribution likely. A 1QFY25 opening is still expected but the opening lettable area of the Alam Sutera outlet in Tangerang is now expected to be larger. Judging by the design and structure, the outlet resembles a single-phase project (e.g. Genting Highland Premium Outlets) rather than staggered multi-phase expansion (e.g. Johor Premium Outlets). As such, on opening in 1QFY25, the lettable area of the Alam Sutera outlet is now estimated to be 1.5x to 2x larger than our earlier assumption which is expected to push overall outlet contribution from 10-15% of net profit currently towards 20-30% from FY25 onwards.

The single-phase opening of Alam Sutera also backs the view that a second Premium Outlets in Greater Jakarta is likely. We believe (a) GENP has secured suitable land at Sentul City near Bogor and (b) Greater Jakarta is large enough to comfortably accommodate more than one Premium Outlets style mall.

Forecasts. We raise FY24-25F earnings by 3-9%, respectively, on better yields and higher contribution from the group's Jakarta outlet.

Valuations. TP is raised by 11% from RM5.30 to RM6.00 based on 1.0x PBV (which within the sector PBV range of 1-2x). We are also removing a 10% risk premium introduced after GENP reported weaker-than-expected 2QFY24 results on poor yields as we believe FFB yields are starting to recover. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 2). Upgrade from UNDERPERFORM to OUTPERFORM.

Risks to our call include: (i) impact of weather and labour shortages on yields, (ii) weak CPO and PK prices, and (iii) cost inflation e.g. for fertilisers.

Source: Kenanga Research - 14 Oct 2024