Genting Plantations Bhd
(April 16, RM10.62)
Maintain neutral with a lower target price (TP) of RM10 (previously RM10.33): After seeing disappointing financial year 2018 (FY18) results, we expect Genting Plantations to chalk up a better performance riding on the: i) double-digit fresh fruit bunch (FFB) production growth from Indonesia; ii) recovery of crude palm oil (CPO) prices; and iii) improved performance from its biodiesel operations, led by the widening of the palm oil-gas oil (Pogo) spread. Nevertheless, we have already factored this in our projection. Meanwhile, we also lowered our earnings forecasts for FY19 through FY21 by 10% to 14% due to higher cost assumption and also roll-over our valuations to forecasted financial year FY20F (forecast). Consequently, we maintain a “neutral” call but with a lower TP of RM10..

As of FY18, total planted area stands at 143,827ha with an average age profile of 11 years. Nearly 17% of the total planted area is under the past prime age, which will be subject to replanting. This year, management expects to see an additional mature area of 7,000ha coming from Indonesia after seeing an increase of 4,300ha. This will likely bring the total group mature area to 116,822ha. Riding on the expanded mature area and young age profile in Indonesia, management targets to see FFB production growth of 10% to 15%, likely surpassing 2.3 million tonnes. The plantation company targets to replant about 3,000ha to 3,500ha in Malaysia this year while Indonesia still has about 8,000ha plantable area

The management targets to see a lower cost of production of RM1,500 a tonne to RM1,600 a tonne versus RM1,700 a tonne in FY18 despite higher costs in fertiliser (+12% year-on-year [y-o-y]) and a higher minimum wage policy in Malaysia (+10% to19% y-o-y) and Indonesia (+8% y-o-y) The lower production cost is likely driven by an increased FFB production of 10% to 15% and annual wage saving of RM14 million from Malaysia following a rationalisation in the fourth quarter of the FY18, which helped to reduce about 320 workers or 4% of total Malaysian workforce

The group will recognise one-off profit of RM13 million in FY19 due to withholding of some palm oil inventories in 4QFY18 as CPO prices were relatively bad.

Following the implementation of a biodiesel mandate in Malaysia two months ago while the Pogo spread has widened again to above US$110 (RM454.30) a tonne, we think the demand for discretionary blending will look quite attractive as it requires little subsidy to be commercially viable. We expect to see a higher utilisation rate this year (versus 2018’s 46%) on the back of stronger demand from domestic (B10 for transport sector and B7 for industrial sector) and overseas markets (higher blending of palm biodiesel from China, West Africa and Europe). It will also see better cost saving in logistics, arising from the improved jetty facility at the palm oil industrial cluster in Lahad Datu. — PublicInvest Research, April 16