Genting Plantations Bhd
(Jan 20, RM10.56)
Maintain buy with a higher target price (TP) of RM13.15: After imputing our revised crude palm oil (CPO) price assumptions, we lift our forecasted financial year ending Dec 31, 2020 (FY20F)-FY21F earnings by 13%-29%. As Genting Plantations Bhd is still largely an upstream company (78% of adjusted earnings before interest, taxes, depreciation and amortisation), we believe it will be able to capitalise on higher CPO prices and present better first half of FY20 (1HFY20) earnings.

CPO prices have risen sharply to more than RM3,000 a tonne. While we had expected an improvement in prices towards year end, the strength of the price rally caught us by surprise. We believe there could be a slight correction as there could be some speculative elements at play. We expect 1HFY20 prices to remain high at RM2,700 to RM3,100 a tonne before weakening to RM2,400 to RM2,700 a tonne in 2HFY20.

We revise our CPO forecast up to RM2,600 a tonne for 2020 while leaving our 2021 forecast intact at RM2,500 a tonne. This implies a 22% year-on-year increase in CPO prices from 2019’s average of RM2,129 a tonne. Plantation companies’ earnings are expected to be rerated upwards as the leverage of CPO price change to earnings is much more significant than fresh fruit bunch (FFB) output growth. For the firms under our coverage, every RM100 a tonne change in CPO prices impacts earnings by between 4% and 18% per annum. We expect to start seeing the impact of strong CPO prices on earnings from the fourth quarter of FY19 reporting period (in February 2020), which could trigger another round of share price retracements.

We believe there is still an upside to some stocks as our sensitivity analysis indicates most of our stock picks are still reflecting CPO prices of about RM2,400 to RM2,500 a tonne. We continue to remain positive on the sector’s fundamentals and believe three key factors will keep CPO prices high in 2020: i) A CPO deficit is imminent in 2020 as demand growth outstrips supply growth and stock/usage ratios fall below historical averages; ii) biodiesel is still a “go” in Indonesia and Malaysia; and iii) food demand should remain strong in China and India.

We keep our recommendation with a higher sum-of-parts-based TP based on unchanged 30 times FY20F target price-earnings for the plantation wing. The TP implies enterprise value per hectare of US$18,000 (RM73,080), in line with peers’ range of US$15,000 to US$20,000. A CPO price upcycle would bode well for Genting Plantations’ mostly upstream earnings, while decent double-digit FFB growth should provide a stable earnings base. — RHB Research Institute, Jan 20