Genting Plantations Bhd
(April 2, RM10.20)
Maintain hold with target price of RM10.10: Genting Plantations Bhd has become an integrated player with its downstream expansion plan in the past few years. It purchased a biodiesel plant back in 2011 but it was not in operation until 2014 as Genting Plantations took advantage of the high biodiesel demand in the market. Since then, it has become more aggressive in its downstream venture with the acquisition of another biodiesel plant and the most recent joint venture (JV) with Musim Mas Group to build a refinery. We are neutral on its move into downstream operation as diversification of its income stream and synergies benefit Genting Plantations since it can leverage on its JV partner’s expertise.

While Genting Plantations has been expanding its downstream operation, its upstream plantation business will remain its major earnings contributor. Contribution from downstream business is likely to be insignificant as its bio-refinery and refinery plants are expected to be completed in the second half of financial year 2016 (2HFY16) and FY17. In FY14, its upstream operation contributed about 76% of its total earnings before interest, taxes, depreciation and amortisation while the property division accounted for about 24%.

Thus far in the first quarter of financial year 2015 (1QFY15), we gather that fresh fruit bunch (FFB) production has been relatively weak and management is expecting a -5% year-on-year (y-o-y) (about -24% quarter-on-quarter [q-o-q]) contraction in 1QFY15. Malaysia’s production is likely to be affected by the lagged impact from 1QFY14 while its Indonesia production was affected by the lagged impact from the dry weather in 3QFY14 despite larger mature area. The slowdown in production is in line with the industry trends whereby most planters experienced weak production during the quarter. Coupled with the weak crude palm oil prices, Genting Plantations 1QFY15 results are likely to be weaker q-o-q and y-o-y.

Although we are expecting weak production in 1QFY15, production is likely to pick up again from April 15 as we are entering the peak production season. For FY15, we are expecting about 10% to 12% FFB production growth from the 1.66 million tonnes in FY14, in line with management guidance, mainly coming from its Indonesia estates while its Malaysia FFB production would be flattish due to the lagged impact from the dry weather in the past two years.

Collaboration with strategic partners such as Musim Mas and Elevance Renewable Sciences (ERS) for its downstream operation will allow Genting Plantations to tap into their expertise and networks.

Genting Plantations has partnered ERS, a specialty chemicals company, in a JV to convert its 200,000-tonne biodiesel plant to a 240,000-tonne bio-refinery to produce high-value-added palm oil derivative at lower cost and greater efficiency. ERS is a US-based company which is owned by private equity corporations such as TPG Biotechnology Partners II, LP, TPG Star LP and Navelance SA, and Genting Bhd. Also, ERS has a partnership with Wilmar International for its first metathesis plant located in Gresik, Indonesia. Genting Plantations bio-refinery plant is expected to be completed in 2017.  — UOB KayHian, April 2

This article first appeared in The Edge Financial Daily, on April 3, 2015.