KEY INVESTMENT HIGHLIGHTS

• 9M20 normalised earnings rose to RM153.8m (+98.3%yoy) which was within our and consensus expectations
• This was mainly attributable to higher CPO and CPKO price of RM2,478/mt and RM1,432/mt respectively
• Plantation division to be the key earnings driver in view of elevated CPO price and an expected recovery in FFB output
• Recovery in the downstream and property segment is anticipated post conditional movement control order
• Maintain BUY with an unchanged TP of RM12.40

A strong set of results. Genting Plantations Berhad’s (GENP) 3QFY20 normalised earnings jumped by +278.8%yoy to RM67.7m. This led to cumulative 9MFY20 normalised earnings of RM153.8m (+98.3%yoy), which was primarily driven by higher CPO price. This came in within our and consensus’s expectation as it accounted for about 63.4% and 65.7% of the full year FY20 earnings forecasts. Moving forward, we expect the favourable CPO price and recovery in FFB production would further support the earnings growth momentum in the coming quarters.

Higher CPO price buoy profit margin. The higher 9MFY20 earnings were mainly attributable to the recovery in average selling price (ASP) of CPO and CPKO to RM2,478/mt (+26.0%yoy) and RM1,432/mt (+23.0%yoy) respectively. This led to an expansion in EBIT margin by +4.5ppts yoy to 12.9%. We are of the view that the group will able to continue to maintain a healthy profit margin given the elevated CPO price on a year-over-year basis.

Expecting FFB production to gradually recover in 4QFY20. The group’s 9MFY20 FFB production fell by -8.0%yoy to 1.5m mt, indicating a gradual recovery in crop output. The decline was largely caused by the lagged effects of adverse conditions in 2019. Nonetheless, we opine that the group’s FFB yield is expected to continue be improving from an increase in harvesting area and a better age profile primarily from its Indonesian estate. Thus, we are now expecting FFB output to remain resilient in FY20, achieving a flat growth on a year-over-year basis.

Property segment. 9MFY20 EBITDA for the property segment declined by -6.6%yoy to RM16.1m (refer to table 1) on lower property sales. However, sales and traffics at both the Premium Outlets have seen encouraging recovery towards the end of 3QFY20 on easing of lockdowns. However, the recent resurgence of Covid-19 cases might further impede recovery in this segment. On a longer term, we foresee a gradual rebound in the property segment on the resumption of more robust economic activities post-CMCO and the revival of the HomeOwnership campaign as announced by the Malaysian Government.

Downstream segment. EBITDA for the segment declined by -16.7%yoy to RM27.9m in 9MFY20 (refer to table 1). This was predominantly due to lower sales of refined palm products as affected by the virus outbreak and MCO. According to our channel checks, the downstream segment has seen a strong recovery post MCO as the resumption of business activities and continued implementation of higher biodiesel mandate could help to support demand for biodiesel discretionary blending and refined palm products from its refinery. Nonetheless, the current wide POGO spread is anticipated to dampen demand for biodiesel.

Earnings estimates. We are making no changes to our earnings forecast at this juncture.

Target Price. We are maintaining our target price of RM12.40. This is based on sum-of-part valuation methodology as shown in Table 2 below.

Maintain BUY. We continue to believe that the current healthy CPO price will result in a more favourable profit margin for the group. We also expect a gradual recovery in FFB yield that could possibly outperform the industry average. This is predicated on the improving age profile at its Indonesia plantations where FFB yield would increase as trees come into maturity soon. All in, we expect these factors to support the group’s earnings in the coming quarters. Although the ongoing Covid-19 outbreak and unfavourable palm oil gas oil (POGO) spread might dampen demand in the intermediate term, we believe that the group will still be able to capitalize on the favourable CPO prices, its resilient FFB growth as well as the higher biodiesel mandate in driving earnings momentum at its mainstay plantation segment. In addition, we also expect the property segment to continue to record steady upward performance in anticipation of resumption in economic activities. All factors considered, we are maintaining our BUY recommendation on GENP.

Source: MIDF Research - 26 Nov 2020