• Downgrade to SELL from Neutral, new MYR7.35 TP from MYR8.90, 10% downside. Genting Plantations’ 1Q22 earnings came in below our and consensus estimates. While FY22 should be stronger due to higher prevailing CPO prices, Indonesia’s domestic market obligation (DMO) policy and higher levies should dampen profitability. We believe valuations are rich – the counter is trading at 17.7x 2023F P/E, vs big-cap peers’ 15-17x P/E.

• 1Q22 results were at 18-20% of our and Street full-year projections, on lower-than-expected downstream profits and higher unit costs.

• Briefing highlights:
  i. In 1Q22, GENP recorded an FFB decline of 0.8% YoY, and this dropped further to -1.4% YoY in 4M22. For FY22F, GENP has cut its FFB growth guidance to 5% (from 5-8%). Management noted that there was heavy rainfall in the first two months, which affected 1Q output, but this has since eased in April. We lower our FY22-24F FFB growth to 3-5% (from 4-6%);
  ii. Blended unit costs were MYR2,075/tonne (+4% YoY) in 1Q22. GENP is now guiding for unit costs to rise 16% YoY to MYR2,200/tonne in FY22 (from MYR1,900/tonne previously), on higher fertiliser costs (estimated at +150% YoY) as well as a spike in labour costs due to the minimum wage hike impact. GENP does not have any significant labour shortage (5% currently), but expects workers to start coming in in July-August. We raise our fertiliser price assumptions accordingly;
  iii. CPO price achieved was MYR4,797/tonne in 1Q22, significantly lower than Malaysian Palm Oil Board’s pricing due to its Indonesian estates, which were affected by the higher taxes as well as the DMO impact. While the export ban did not have much impact on GENP’s earnings (it had enough storage capacity for the period), the DMO impact would affect it in the months ahead, depending on the price point. GENP has sold forward about 12% of its output up to 3Q22, at undisclosed prices;
  iv. The downstream division saw EBITDA sink 77% QoQ to MYR3.7m in 1Q22 (from 16.2m in 4Q21) (under “Others” in Figure 1), with margins falling to 2.2% (from 3.7% in FY21). The utilisation rate was flattish at 22% for biodiesel, but declined to 28% for the refinery (from 60% in 4Q21). This caused the refinery subdivision to reverse into losses in 1Q22. Going forward, management believes demand should pick up for the refinery and hopes to be able to break even in 2Q22. We trim margin assumptions for this division for FY22-24, to be conservative.

• We cut our stock rating to SELL, with a lower SOP-based TP of MYR7.35. Despite raising CPO prices to MYR5,300 (from MYR4,300) for FY22F and to MYR4,300 (from MYR3,600) for FY23F, we lower FY22-24F earnings by 1-4%, after lowering downstream contributions and raising cost assumptions. GENP’s valuation of 17.7x FY23F P/E is on the high end of its big cap peer range of 15-17x. Our TP includes a 12% ESG discount based on RHB’s ESG score of 2.4.

• Upside risks include positive policy changes in Indonesia and changes in supply and demand dynamics for palm oil, amongst others.

Source: RHB Research - 26 May 2022