However, it raised the fair value (adjusted discounted cash flow value) to RM5.15 (weighted average cost of capital at 11.7%; terminal growth rate at 3%) from RM5 previously based on changes in expansion assumptions as faster expansion meant a faster payback.

HwangDBS Vickers expected 2Q09 earnings to fall about 40% year-on-year (y-o-y), to account for a 28% y-o-y drop in spot crude palm oil (CPO) prices to RM2,541 per tonne.

“We also understand that GENP experienced an extended biological tree stress, which spilled over to 2Q09,” it said in a report yesterday.

The research house said that had led to 11% y-o-y drop in fresh fruit bunches (FFB) production to 256,251 tonnes in 2Q09, while poorer yield was partly mitigated by y-o-y lower cost of sales with cuts in outside FFB purchase and fertiliser costs.

“On q-o-q basis however, GENP should still book significantly higher 2Q09 net profit, taking into account the 32% q-o-q increase in CPO prices; and 3% q-o-q rise FFB production,” HwangDBS Vickers Research said.

It said 2Q09 new planting picked up significantly.

“We understand that GENP had expanded by about 3,300ha in Indonesia in 2Q09 due to improved weather. This brought total planted area there to about 11,000ha as at end-June 09. For 1H09, the group planted about 4,500ha, notably higher than our initial expectation of about 4,900ha for the full year,” it said.

To reflect that development, HwangDBS Vickers Research raised its new planting assumption to 8,000ha this year, as it expected planting activities to accelerate in 2H09, but likely slower h-o-h as harvesters would will start their month-long fasting next month, followed by a one-two week shutdown for the Eid festival.

HwangDBS Vickers Research cut the FY09 production growth forecast to -2.5% from +0.5% previously, mainly due to slower-than-expected yield recovery in 1H09.

“We understand that FFB production picked up m-o-m in July but was still lower y-o-y. As a result, FY09 forecast earnings were lowered by 3.2% to RM245.5 million.

“We had also finetuned FY10F-FY11F downwards by 2.1%-2.2% to account for the 4% reduction in harvesting area in 1Q09 for replanting which reduced FFB production by 1.6-1.7%,” the research house said.

GENP rose 15 sen yesterday to close at RM5.80.

This article appeared in The Edge Financial Daily, July 29, 2009.