Following a sector-wide CPO price  downgrade, we  lower  our earnings projections  for  Genting  Plantations  by  20.1%  for  FY14  and  21.0%  for FY15. We reduce our SOP-based FV to MYR11.15  (from MYR13.25) but maintain  our  BUY  recommendation,  as  its  strong  FFB  production growth would  help offset the lower CPO prices, while valuations would fall to more attractive levels by FY15.

Downgrading  sector-wide  CPO  prices.  We  are  downgrading  the Malaysian  plantation  sector  to  NEUTRAL  (from  Overweight).  Our  CPO price assumptions  are  lowered  to MYR2,400/tonne  (from MYR2,700) for CY14 and MYR2,500/tonne (from MYR2,900) for CY15. 

Palm oil prices close to bottom. We believe palm oil prices are weeks away from a bottom and should strengthen in the 4Q as well as in CY15. That said, the current low levels  would  pull down the full-year average –hence the cut in our assumptions. 

We  expect  prices  to  strengthen  in  4Q14  and  2015,  from:  i)  theseasonal slowdown in production  in 4Q14. Since 2000, production has slowed  down  in  tandem  with  CPO  prices  rising  11%  from  end-Sept  to end-Dec  each year, ii)  the slower-than-expected off-take for biodiesel in Indonesia  in  2014  caused  by  pricing  issues  is  no  longer  applicable, while  distribution  infrastructure  is  being  developed,  which  should  see Indonesia‟s  B10  programme  going  into  full  swing  in  2015,  and  iii)  the limited  downside  for  soybean  prices  as  it  is  already  trading  at  or  near production  cost.  Although  the  stock/usage  ratio  may  be  high  this  year (>30%)  due  to  the  bumper  crop  in  the  US,  it  does  not  usually  stay  at such elevated levels.  

Reducing  forecasts.  We  pare  our  forecasts  for  Genting  Plantations following the sector-wide CPO price cut of 20.1% for FY14 and 21.0% for FY15. Our CPO price assumptions are  now at MYR2,280/tonne for FY14(from MYR2,700) and MYR2,375/tonne for FY15 (from MYR2,900). Note that our forecasts have imputed  the export tax impact of 5%,  applicable at our price assumptions. 

Maintain BUY. We trim our SOP-based FV to MYR11.15 (vs MYR13.25) based on  an  unchanged 18x CY15 target P/E  for  its plantation  division and RNAV for its property unit.  Maintain BUY,  as the company‟s  strong FFB  production  growth  may  help  offset  the  lower  CPO  prices,  while valuations  would  fall to more attractive levels by FY15.  We highlight  itsearnings  sensitivity  to  CPO  prices,  whereby  every  MYR100/tonne change in CPO price would affect its earnings by 5-7% per annum.

Source: RHB