THE shares of Genting Plantations Bhd (GenP) have risen just 11% in the past five weeks since tumbling from a high of RM11.59 on July 2 to RM9.70 on Oct 16. Despite its recent retracement, many analysts are still either “neutral” or bearish on the stock. They outnumber the seven analysts who have a “buy” by two to one.

It is little wonder then that the average target price for the stock is only RM10.93, implying an upside potential of just 1.6% from its close last Wednesday of RM10.76.

The more bullish of the analysts, however, think there is significant upside for GenP. RHB Research, for instance, says the stock would be trading at five to six times CY2015 earnings (compared with 18 times) if one were to remove the value of its property landbank from its market capitalisation. RHB has a “buy” recommendation and RM11.60 target price on GenP, according to its Nov 21 note.

“There is a lot of asset value in the company, which the market may appreciate,” says a local analyst.

If the optimistic analysts are right, the warrants issued by the company could be a cheaper alternative to leverage any future upside.

GenP-WA has a strike price of RM7.75 and a conversion ratio of one to one. It matures on June 17, 2019, giving it another 4½ years to run.

At its RM2.60 close last Wednesday, the warrant was trading at a 3.81% discount to the underlying share. If GenP gained 7.8% to reach RHB’s target price of RM11.60, GenP-WA should theoretically be worth 48% more at RM3.85 — assuming zero premium to the underlying share.

According to Maybank Investment Bank analyst Ong Chee Ting, GenP’s earnings usually peak in the fourth quarter. “The fourth quarter is traditionally GenP’s strongest plantation production period. This is also when the lowest cost of production for the year is seen as the application of manure would have been substantially completed,” states Ong in his Nov 21 report.

If GenP records better 4Q results, which will be released in February 2015, its shares and warrants will be buoyed by the positive sentiment. The company recorded a 95% year-on-year increase in net profit to RM239.6 million for the nine months ended Sept 30, 2014.

While a further slide in crude oil prices from US$80 levels could weigh on crude palm oil (CPO) prices, GenP will benefit if the latter recovered to RM2,400 per tonne by the end of this year and RM2,600 by 1Q2015, says an analyst, adding that CPO is up 16% from its low of RM1,929 per tonne on Aug 29.

This article first appeared in The Edge Malaysia Weekly, on December 1-7, 2014.

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