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We expect Genting Plantations (RM6) to deliver slightly better earnings in the second half of 2009 (2H09) compared with the first half of the year. This is assuming crude palm oil (CPO)  prices remain steady at about RM2,200 per tonne and fresh fruit bunches (FFB) output strengthens in the last few months of 2009.

The company made RM96 million profits in 1H09 on the back of turnover totalling RM319.3 million. Net profit was down 58% year-on-year (y-o-y) due, primarily, to lower average CPO selling prices as well as FFB output.

Genting Plantations sells the bulk of its CPO in the spot market. Prices averaged at RM2,209 per tonne in 1H09 compared with RM3,473 per tonne in the previous corresponding period.

Meanwhile, FFB output dropped by about 8% y-o-y over the same period. This was attributed to wet weather conditions in East Malaysia in the first few months of the year, which affected fruit formation, yields and oil extraction rates.

The plantations arm was the biggest earnings generator, accounting for 97% of total operating earnings before interest and tax. The remaining earnings were from its property unit, which will remain marginal relative to the plantations business going forward.

CPO prices may stay range-bound near term


 
 
CPO prices registered some volatility in the first half of the year — rising as high as RM2,800 per tonne in mid-May 2009 before falling below RM2,000 per tonne in early-July 2009. Selling prices averaged roughly RM2,100 per tonne in July 2009 and improved to about RM2,400 per tonne in August 2009. Since then, prices have weakened slightly, trading range-bound between RM2,100 and RM2,200 per tonne.

The market remains divided on the outlook for the commodity going forward.

There are some indications that demand is tapering off after intense stockpiling activities in 1H09. The pace of Malaysia’s export growth slowed in 2Q09 compared with 1Q09. The latest set of data released by the Malaysian Palm Oil Board (MPOB) showed exports falling 10.3% y-o-y in August 2009 while preliminary estimates suggest the contraction has continued into the current month.

Poor production so far this year, due to bad weather conditions, had kept stockpiles low, which, in turn, supported prices. The country’s total FFB output contracted about 4% y-o-y in the first eight months. Stocks stood at about 1.42 million tonnes at end-August 2009, well below the high of 2.27 million tonnes in November 2008.

However, production is expected to gain momentum in 4Q09 as the effects from biological tree stress wear off. Thus, we could see stockpiles rising over the next few months, which would keep a lid on CPO prices.

Prevailing weather forecasts around the world are also supportive of good crop production in the near term. For instance, a bumper soybean harvest is expected in the US this fall season. This has tempered prices for soyoil, the primary alternative to CPO.

On the other hand, some market observers believe prices will trend higher on the back of steady growth in demand and relatively tight global supply of edible oil. This may yet turn out to be true.

Crop prices have become increasingly volatile as the result of unpredictable and often, extreme, weather conditions around the world, which create havoc for plantings and harvests. Any shortfall in production would drive prices up against the backdrop of steady growth in underlying demand.

Additionally, commodity prices, in general, are expected to trend higher should the greenback continue to weaken against other major currencies.

On balance, we are assuming fairly conservative CPO prices of around RM2,100-RM2,200 per tonne going forward.

Genting Plantations shares fairly valued, for now
Based on our forecast, Genting Plantations’ shares appear fairly valued, for now — at 21.7 and 20.9 times our earnings estimates of 27.7 sen and 28.7 sen per share for 2009-2010, respectively. Of course, there will be room for upside gains if CPO prices rally and are sustained at higher levels.

The company’s FFB output is expected to contract by about 5% this year, assuming stronger production in 2H09 to partially offset the 8% drop in 1H09.

Output is expected to resume growth in 2010, we estimate by roughly 5% — and should continue to rise going forward as more trees enter prime production ages. Genting Plantations has a relatively young oil palm plantation profile. About three-quarters of its trees are under 15 years old.

Expansion plans support longer-term growth

Genting Plantations had land bank totalling over 80,000ha, of which about two-thirds were planted and mature areas, as at end-2008. An additional 61,000ha of land, all in Kalimantan, Indonesia was acquired this year.

The company is planning to plant up some 50,000ha of land bank, under various joint ventures, between 2009 and 2012. It is also pursuing approvals for the acquisition of more land in Kalimantan.

Its strong balance sheet would well be able to support the company’s expansion plans. Genting Plantations is sitting on net cash totalling RM479.4 million at end-June 2009. Net tangible assets stood at RM3.09 per share.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.


This article appeared in The Edge Financial Daily, September 23, 2009.

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