INVESTMENT HIGHLIGHTS

• 1HFY19 normalised earnings of RM66.1m (-46.6%yoy) came in below ours and consensus expectations

• This was mainly due to the lower-than-expected average selling price (ASP) of both CPO and CPKO

• Earnings revised downwards for FY19 and FY20 in view of profit margin compression

• Maintain SELL with a revised TP of RM8.40

Earnings almost halved. Genting Plantations Berhad’s (GENP) 1HFY19 normalised earnings plunged by -46.6%yoy to RM66.1m. This came in below expectation as it accounted for merely 31.8% and 30.8% of both our and consensus full year FY19 earnings forecasts. This was primarily attributable to the declining ASP of CPO and CPKO. It was evident from the fall in the reported revenue and profit before tax of its plantation segment by -4.0%yoy and -31.0%yoy to RM594.3m and RM171.2m respectively, signifying a lower margin for the group.

Declining EBIT margin. 1HFY19 EBIT margin dropped by -10.6ppts yoy to 8.8% as a result of weaker CPO and CPKO’s ASP of RM1,960/metric tonnes (mt) and RM1,194/mt as compared against RM2,336/mt and RM1,908/mt of the same period in prior year, representing a decrease of -16.0%yoy and -37.0%yoy respectively. Meanwhile, the improvement in FFB production of +11.0%yoy to 1,069k was insufficient to moderate the fall in the ASP of CPO and CPKO. In addition, the higher margin at the downstream segment also couldn’t make up for the compressed margin at the plantation segment.

Dividend. The group has declared an interim dividend of 3.5sen per share to be payable on 9 October 2019. This represents 29% of our full year dividend forecast of 12.1sen per share.

Earnings forecast. In view of the earnings underperformance and sustained weak CPO pricing, we are revising downward our FY19 and FY20 core earnings forecast by -17.8% and -5.3% to RM170.6m and RM250.2m respectively.

Target Price. We are deriving a new target price (TP) of RM8.40 (previously RM8.90). This is premised on the sum-of-part valuation. Note that for the plantation division we are pegging a target PER of 24.0x which is the group’s average two-year historical PER.

Maintain SELL. The weak CPO price environment continues to impact the group’s profitability. Although there is a notable growth in FFB production, it wasn’t enough to compensate for the falling price of CPO. The lower blended ASP for group’s palm oil has been plaguing the company’s profit margin which declined to below 10% as compared to almost 20.0% the prior years. We also opine that there will be limited improvement in CPO price in the foreseeable term. In addition, most of GENP’s biodiesel are sold to the European market. Thus, given the margin compression and lower profit forecasted in FY19, we view that the dividend yield would also not be attractive in the medium term for investors to hold onto the stock. As such, we are maintaining our SELL recommendation on GENP.

Source: MIDF Research - 29 Aug 2019