KEY INVESTMENT HIGHLIGHTS

• Higher CPO selling price in line with industry average
• Downstream profit reversed to black
• Earnings estimates; maintain
• Upgrade to BUY with an unchanged TP of RM6.10

Seasonally low earnings cycle. After inclusion EIs of RM6.5m, GenP's core PATAMI came in at RM66.2m (-14.5%yoy), on higher tax expense of -RM32.2m due to expenses not deductible for tax purposes. While, this was largely considered within our/consensus estimates, making up about 40.3% and 37.2% of full-year estimates, given that the weakness in 2Q was in line with low crop seasonality factors, and we do anticipate earnings to play some catch up later in 2HFY24.

Upstream & Downstream. Profit for both upstream and downstream remain intact at RM115.5m (+1.6%yoy) and RM3.4m (>100%yoy), respectively. Margins for upstream division contracted by -9.0pts yoy to 20.4%, following flattish FFB output recorded in the quarter. Meanwhile the fixed cost was maintained, resulting in the margins squeezed by the cost of production at circa RM2,800/Mt. This was, however, moderated by higher downstream profit contribution, as the segment margins expanded to 1.0% (+5.5pts yoy), despite lower sales volume and low utilisation rate reported.

Operational performance. FFB production of 484,000 Mt (-2.6%yoy) was relatively comparable to prior year, which was well supported by Indonesia output due to favourable age profile and expanded harvesting area. Whilst Malaysia production remain muted due to ongoing big scale replanting activities carried away 200 ha and dry weather spell - biological stress in palm trees from Jan to April. Average selling prices on the other hand, were slightly higher at RM3,797/Mt (2QFY23; RM3,584/Mt) and RM2,299/Mt respectively, for CPO and PK.

Outlook.The FFB production anticipated to pick up in 2H24, underpinned by additional and progression of existing mature areas into higher yielding brackets in Indonesia. Nevertheless, the ongoing replanting activities in Malaysia may have a moderating effect on the Group's production growth. Meanwhile, downstream was facing stiffer competition from its Indonesian counterparts, which enjoy competitive pricing for feedstock due to price differential arising from the imposition of export levy.

Recommendation. We tactically upgrade GenP to BUY call from NEUTRAL call following the softened share price which we believe lead to buying opportunities, due to the relatively cheaper valuation. Our unchanged TP of RM6.10, derived from PER of 16.9x (nearly 2y average historical +1SD) pegging to FY25F EPS of 35.9sen.

Source: MIDF Research - 29 Aug 2024