9MFY24 core net profit (CNP) was marginally (5%-6%) below our and consensus our estimates. Despite better margins, 3Q earnings ended weaker than expected as recovering harvest looks set to peak in 4Q rather than in 3Q. Instead of "contribution" in 1H, minority also normalised to further eat into 3Q CNP. Overall, firm- to-better FFB harvest and CPO prices are expected in 4Q and FY25 but FY24 and FY25 earnings forecasts are tuned down marginally, by 6% and 1%, respectively, while TP of RM6.00 and our OUTPERFORM call are left unchanged.

9MFY24 CNP slipped 4% YoY. Excluding forex gains of RM22m and RM9m in net disposal gain, 9MFY25 CNP of RM180m accounted for 64% and 65% of full-year estimates of Kenanga and consensus, respectively. Upstream plantation EBIT was flat YoY as its Indonesian harvest was still recovering in 3Q to likely peak only in 4Q.

Nonetheless, higher YoY prices for CPO (+6%) and PK (+22%) helped lifted margins by 1%-2%. No dividend was declared for 3Q, which is the group's usual practice.

3QFY25 CNP ended lower QoQ and YoY on flat plantation EBIT as fruit production of 0.543m MT (+12% QoQ, -6% YoY) was still recovering from a poor 1H while flattish-to-stronger QoQ and YoY prices for CPO and PK continue to buoy margins. Production cost eased from RM2,880 per MT CPO in 1H to RM2,710 for 9M FY24 on recovering yields and higher PK prices. Downstream remains challenging but managed to eke out a thin EBIT of RM0.5m versus losses a year ago.

Looking ahead, upstream earnings are expected to improve. Firm CPO prices are likely to stay in 4Q and into FY25 as edible oil demand looks to outpace supply growth causing global inventory levels to decline again in CY25. Therefore, edible oil pricing environment is expected to be supportive, including for CPO. For CY24-25, we expect average CPO price of RM4,000-RM4,200 per MT but as 60% of GENP's CPO are from Indonesia where prices are lower, GENP's CPO is expected to average closer to RM3,600-RM3,800 per MT for FY24- 25.

Meanwhile, input costs such as fertiliser and energy are staying soft. At the same time, PK prices and FFB yields are improving, so overall CPO cost looks set to stay contained for the rest of FY24 and even into FY25 despite higher minimum wages in Malaysia from Feb CY25 onwards.

Downstream contribution remains minimal but property earnings are growing from: (a) ongoing Indahpura township development, (b) new Batu Pahat industrial park, and (c) opening of a new and first Premium Outlets in Greater Jakarta come around March CY25.

Forecasts. FY24-25 core EPS are toned down by 6% and 1%, respectively, as we suspect one or more of its Indonesian subsidiaries have reverted back to profitability, hence a normal minority adjustment moving forward rather than a positive contribution as occurred during 1HFY24.

Valuations. Maintain OUTPERFORM and TP of RM6.00 based on 1.0x PBV or in line with the plantation sector 1-2x PBV range with no ESG adjustment to our TP based on a 3-star rating as appraised by us (see Page 3).

Risks to our call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues, (ii) impact of weather and labour shortages on production, (iii) weak CPO and PK prices, and (iv) cost inflation particularly fertilisers.

Source: Kenanga Research - 28 Nov 2024