Genting Plantations Bhd
(March 9, RM10.10)
Maintain buy with a target price (TP) of RM12.50: Genting Plantations announced last Friday the signing of an agreement with the Musim Mas Group to set up a palm oil refinery in the palm oil industrial cluster of Lahad Datu, Sabah. The venture, estimated to involve an investment of RM300 million, will involve a 600,000 tonne per annum (1,800 tonnes per day) refinery plant.

Completion of the refinery is targeted for the second half of its financial year ending Dec 31, 2016 (2HFY16). Genting Plantations would take a 72% interest in Alfa Raya Development Sdn Bhd, the entity created for the collaboration, with Musim Mas taking up the remaining 28% stake.

Genting Plantations’ chief executive officer Tan Sri Lim Kok Thay also revealed that the refinery will be part of the Genting integrated biorefinery complex, hinting at further steps over the long run into the palm oil derivatives business.

We are “neutral” on this venture. Although the venture should be long-term earnings accretive, margins would be diluted — especially when export taxes are zero. Nevertheless, we believe the downstream operations can provide diversification and synergistic benefits as Genting Plantations is primarily upstream focused. Musim Mas’ involvement should also add value, given its size and experience in the refining business.

Genting Plantations’ 72% stake would cost RM216 million, which we believe can be comfortably absorbed given its net cash position. We anticipate negligible impact on Genting Plantations’ FY16 forecasted earnings, and leave our estimates unchanged for now pending further details and analysis.

We continue to like Genting Plantations’ strong balance sheet and young tree age profile, which should drive group’s earnings compound annual growth rate of 17% for the next three years. Our sum-of-parts-derived TP of RM12.50 implies a 23.7% upside. — AllianceDBS Research, March 9

This article first appeared in The Edge Financial Daily, on March 10, 2015.