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This article first appeared in The Edge Financial Daily on August 7, 2019

Genting Plantations Bhd
(Aug 6, RM9.36)
Maintain hold with a lower target price (TP) of RM8.97:
Our recent meeting with Genting Plantations Bhd’s management reaffirms our less positive view of its near-term earnings prospects, as fresh fruit bunch (FFB) output growth, decent earnings contribution from downstream operations and premium outlets are insufficient to mitigate depressed crude palm oil (CPO) prices and higher production cost.

We expect the 10.8% FFB output growth achieved in the first half of 2019 (1H19) to sustain into 2H19 (if not better), underpinned by an expected 4,000ha of planted land bank in Indonesia moving into mature bracket in financial year 2019 (FY19).

However, higher FFB output and joint-venture (JV) earnings are insufficient to cushion Genting Plantations’ earnings from low CPO price (which has fallen by about 5% year to date) and higher production cost (arising from higher labour and fertiliser costs).

Despite the improvement in property sentiment in Kulai since the 14th general election, the property development division will likely register weaker earnings before interest, taxes, depreciation and amortisation (Ebitda) in FY19, as decent performance registered in FY18 was partly driven by its efforts in marketing its inventories of properties and expediting of construction works on ongoing projects.

We believe earnings contribution from JVs (which is derived mainly from Johor Premium Outlets [JPO] and Genting Highlands Premium Outlets) will expand further into FY19 and FY20, underpinned by a 16.8% increase (or 45,000 sq ft) in net lettable area in Johor Premium Outlets since end-1Q19 and the introduction of more premium brand outlets (such as Prada and Bottega Veneta) at JPO.

Favourable refining margin, widened palm oil gas oil (Pogo) spread since and increased biodiesel mandate have resulted in downstream division’s adjusted Ebitda multiplying to RM21.9 million in 1Q19 (from RM400,000 and RM2.8 million in 1Q18 and 4Q18).

While profitability at the division may remain volatile, we believe high Pogo spread and increased biodiesel mandate in Malaysia will continue to drive utilisation rates at Genting Plantations’ downstream operations, hence bringing decent earnings to Genting Plantations. — Hong Leong Investment Bank Research, Aug 6

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