GNEALY (FV RM7.47- NEUTRAL) 9MFY12 Results Review: Fertilizer Cost Damps Profit

Glenealy posted 9MFY12 earnings RM47.7m (-9.9% y-o-y)  as higher fertilizer expenses strained profitability, coupled with slowing  FFB production growth as the early-2010 drought  suppressed production. We think production will recover when June comes around, although this will come a bit too late to provide support for FY12 earnings. Downgrade Glenealy to NEUTRAL with a FV of RM7.47.

Weaker than expected. Glenealy registered 3QFY12 revenue of RM60.0m (-13.2% y-oy on softer palm prices,  -15.0% q-o-q on seasonally lower FFB production). Weak production and higher fertilizer cost dragged quarterly earnings to just RM11.1m (-52.3% y-o-y,  -37.2% q-o-q). Earnings over the  9-month period fell 9.9% y-o-y despite flat realized CPO prices and a 6.0% growth in FFB production as operating expenses spiked 29.7%. Glenealy’s 9MFY12 RM47.7m earnings account for 64.3% of our full-year forecast. The spike in operating expenses  could be attributed to higher fertilizer prices and greater fertilizer application due to fine weather  experienced in 3QFY12. 9MFY12 operating expenses represented 85.8% of our full-year estimate.

FFB production grows at 6%. Quarterly FFB production  growth has slowed substantially from the 12.8% y-o-y growth seen in 1QFY12 to a 1.7% contraction in 3QFY12. The dry spell back in early-2010 could have led to drought-induced production losses this quarter, even though weather has been understood to be reasonably good around the region. Over the 9-month period, the 6.0% production growth seen still trails our forecast of a 9.2% increase. We still think production is primed for a rebound come June as the drought impact subsides, although April and May  (which makes up twothirds of the final quarter) should still experience suppressed production.

Downgrade to NEUTRAL. We trim our FY12 and FY13 earnings forecast by 9.8% and 6.1% respectively as we tone down our FY12 FFB production growth estimate to 6.3% and increase our cost of sales and operating expense assumptions. Our FV is correspondingly cut to RM7.47, based on 12.0x CY12 PER. On an EV per ha basis, the company is still extremely cheap at just USD8,000 per ha but in terms of profitability per planted ha, it is still some distance away from its more established peers. The stock’s trading volume has been thin but the share price has chalked up a 42.0% gain since our BUY initiation in May 2011.

Source: OSK188