FFB  production in 9M14 was stronger than expected, with expectations of  an  even  stronger  2015.    Maintain  BUY, with  a  slightly  higher  TP  of MYR11.60  (10.9%  upside),  as  we  believe  the  company’s  strong  FFB production growth would help offset the lower CPO prices somewhat. On the property front, more property launches will take place in 4Q14, allowing earnings to catch up to FY13’s levels by year-end.

Visit highlights:  i)  The company‟s FFB production growth was  stronger than expected in YTD-Sep 2014, ii) new planting in Indonesia is slowing,iii) the worst is over for CPO prices, iv) production costs may rise slightly next  year,  v)  biodiesel  plants  are  still  profitable,  and  vi)  the  property division playing catch-up in 4Q14.

FFB  production  stronger  than  expected  while  property  will  likely play  catch-up  in  4Q14.  Genting  Plantations‟  FFB  production  in  YTDSep  2014  was  up  11.5%  YoY,  higher  than  management‟s  previous projection  of  10%,  but  slightly  below  our  projected  12%  for  FY14. Management  expects  to  close  the  year  at  10-12%  growth,  as  it  only expects  FFB  production  to  peak  in  October/November.  For  FY15,  it expects FFB growth of 15% YoY, from 8,000ha of new areas coming into maturity during the year, which is in line with our expectations.  On the property front, in the first nine months of FY14, Genting Plantations  onlylaunched  about  300  units,  but  will  likely  play  catch-up  in  4Q14,  with some  350  units  to  be  launched.  Management  is  confident  of  at  least matching  FY13‟s  sales  in  FY14,  not  including  some  industrial  lot  land sales worth c. MYR140m, which will be recognised in 4Q14. 

Earnings  forecasts  tweaked  upwards.  We  tweak  our  earnings forecasts  up  by  4-6%  for  FY14  and  FY15  after  making  the abovementioned changes and introduce our FY16 forecast. We highlight its  earnings  sensitivity  to  CPO  prices,  whereby  every  MYR100/tonne change in CPO price could affect its earnings by 5-7% per annum. 

Maintain BUY. Post-earnings revision, we lift our SOP-based TP slightly to MYR11.60 (from MYR11.15),  on an unchanged  18x CY15  target P/E for  the  plantation division and RNAV of  property development landbank. Maintain BUY, as we believe Genting Plantations‟ strong FFB production growth  would  help  offset  the  lower  CPO  prices  somewhat.  We  also highlight that stripping off the RNAV of the company‟s property landbank from its current market capitalisation would bring its P/E down by 5-6x.

Visit highlights:  i) FFB production growth  was stronger than  expected in YTD-Sep 2014, ii) new planting in Indonesia  is slowing, iii) the worst is over for CPO prices, iv) production costs may rise slightly next year, v) biodiesel plants are still profitable, and vi) the property division will likely be playing catch-up in 4Q14.

Production  stronger  than  expected.  Genting Plantations‟  FFB production in YTD Sep 2014 was up 11.5% YoY, higher than management‟s previous projection of 10%, but slightly below our projected 12% for FY14. Management believes it will close the year with FFB production growth of about 10-12%, as it only expects FFB production to peak in October/November  at its estates in East Malaysia and Indonesia.  In most of  its  estates,  the  company  is  experiencing  normal  weather  except  for  Central Kalimantan, where there is a bit of dryness. However, management highlighted that it does not expect this to affect production significantly, as  the dryness is not extreme, with  rainfall  levels  still  staying  100mm  per  month.  For  FY15,  Genting  Plantationsexpects FFB growth of 15% YoY, from  8,000ha of new areas coming into maturity during the year, which is in line with our expectations.

New  planting  in  Indonesia  slowing.  New  planting  at  its  Indonesian  estates  has been slow in 2014 due to a temporary suspension of membership by  Roundtable OnSustainable Palm Oil (RSPO) from Apr to Sep 2014, which came with a condition that no new planting could be carried out during the period.  As such, the company  has only managed to plant up about 3,000ha of land up to 9MFY14, aiming to plant up 3,500ha  by  year-end.  This  would  fall  short  of  its  original  target  of  4,000-4,500ha. Genting Plantations  has another 100,000ha left to plant, and continues to target new planting  of  10,000ha  per  year.  However,  management  acknowledged  that  this  is going to be tough to achieve, given the ever-evolving regulations in Indonesia as well as demands of environmentalists.  Hence, we have adjusted our  earnings  forecasts accordingly.

Worst  is  over  for  CPO  prices.  In  terms  of  CPO  prices,  although  management believes the worst is over, it does not expect a strong recovery in prices either, as it believes  CPO  supply  is  still  going  to  be  decent.  With  the  export  tax  exemption  in place, Genting Plantations has also been exporting more of its CPO in crude form on its own, exporting about 7-8% of its production per month.

Production costs may rise slightly next year. Production cost in Malaysia currently stands at MYR1,200/tonne, while Indonesia‟s costs are higher at MYR2,000/tonne, bringing the average group cost to MYR1,400/tonne, which should be maintainable for the rest of the year. Going into FY15, production costs may rise slightly, given the indicative  prices  for  muriate  of  potash  (MOP)  fertiliser  that  Genting  Plantations  is currently tendering for, which is about 10% higher YoY. We estimate production costs to rise by 5% in FY15.

Biodiesel plants still profitable.  Genting Plantations‟  downstream division currently comprises  two biodiesel plants  in Sabah  with total capacity of 300,000 tonnes. The plants  are  now  running  about  50%  utilisation  on  average.  We  understand  Genting Plantations  has locked in sales for one of its plants until the year-end, for the export market, and margins are still positive. However, post-2014, Genting Plantations does not  have  any  visibility  yet  as  to  demand.  Presuming  the  Malaysian  B7  mandate  is implemented in East Malaysia by year-end, as targeted by the Government,  Genting Plantations intends to  channel its sales to the domestic market instead, given the still relatively fat margins to be obtained due to domestic pricing model.

Property  division  playing  catch-up  in  4Q14.  In  the  first  nine  months  of  FY14, Genting  Plantations  did  not  do  many  project  launches  at  its  property  division, launching only about 300 units.  Genting Plantations intends to catch up in 4Q14, with some  350 units  to be launched.  Despite this,  YTD9M14 sales  have reached  about MYR150m  already,  up  from  MYR93m  in  1HFY14.  As  this  is  80%  of  total  sales achieved  in  FY13  of  MYR186m,  management  is  confident  of  at  least  matching FY13‟s sales in FY14. We highlight that this does not include some industrial lot land sales  which  were  completed  in  Oct  2014,  for  which  Genting  Plantations  garnered some MYR140m, which  will  be recognised in 4Q14. We have thus imputed this land sale in our earnings forecasts.

Risks
The  main  risks  include:  i)  a  convincing  reversal  in  crude  oil  price  trend  that  may result  in  a  reversal  in  the  prices  of  CPO  and  other  vegetable  oils,  ii)  weather abnormalities triggering an over-  or  under-supply of vegetable oils,  iii) a revision in global  biofuel  mandates  and  trans-fat  policies,  and  iv)  a  slow  global  economic recovery, resulting in weaker-than-expected demand for vegetable oils.

Forecasts 
Tweaking  earnings  forecasts.  We  tweak  our  earnings  forecasts  up  by  4-6%  for FY14 and FY15 after making the abovementioned changes and introducing our FY16 earnings  forecast.  We  highlight  Genting  Plantations‟  earnings  sensitivity  to  CPO prices, whereby every MYR100/tonne change in CPO prices could affect its earnings by 5-7% per annum.

Recommendation and valuation
Maintain  BUY.  Post-earnings  revision,  we  raise  our  SOP-based  TP  slightly  to MYR11.60  (from MYR11.15), based on an unchanged  18x CY15  target  P/E for the company‟s  plantation  division  and  RNAV  of  its  property  development  landbank. Maintain  BUY,  as  we  believe  the  company‟s  strong  FFB  production  growth  wouldhelp offset the lower CPO prices  somewhat.  We also highlight that stripping off the RNAV of Genting Plantations‟ property landbank from its current market capitalisation would bring Genting Plantations‟ P/E down by 5-6x.

Source: RHB