Genting Plantations - Multiple Catalysts in Store

We are maintaining our BUY call on Genting Plantations (GENP) despite the challenging operating conditions this year potentially weighing on earnings. We see multiple stock price catalysts for GENP in the form of higher CPO price next year, improving contribution from its Kalimantan operation, continuous value creation at its Indahpura land and the commercialization of its biotech division. Our FV for the stock is RM11.22 based on sum-of-parts, with a CPO price assumption of RM3,500 for CY13. Our CPO assumption for CY12 stays at RM3,000.

Aiming for flat production this year. GENP’s 6M FFB production declined by 13.2% to 551.2k tonnes due to weakness in its Malaysia plantations, from which output dipped by about 17%. Management guided that if 2H production matches that of last year’s, its Malaysian production would still be down by some 6% to 7%. Although production is starting to pick up as per the seasonal pattern, the recovery will not be sufficient to make up for the YTD deficit. However, including its Indonesian estates’ approximately 100k tonnes of FFB, GENP’s production will be flat this year. The company has some 17k ha maturing this year, while 11k ha will be reaching maturity next year. 

New planting rate to improve. Compared to the 4,508 ha of new nucleus planting achieved in 2011, management expects this year’s new planting to increase to 6,000 ha. In 1H this year, the company had achieved about 2,500 ha of new nucleus planting, along with more than 300 ha of plasma planting.

Commercializing the biotech arm. After having invested about RM300m in the genome mapping research project since 2007, this endeavour is now starting to bear fruit. Management guided that commercialization of its genome mapping works will begin late 2013 or 2014, with initial work to be in the form of services for filtering seeds.

Monetising Indahpura. After launching its Johor Premium Outlet (JPO) at the end of last year, GENP is now planning for phase 2. On top of that, a theme park is also being planned along with several hotels, all of which will further enhance the land value at the Indahpura development/Kulai Besar Estate. The last offer price the company received for land in the area was RM50 per sq ft, while the last transacted price was RM28 per sq ft.

Adjusting earnings. We have tweaked up our FY12 forecast to RM393.1m from RM382.6m previously to factor in flat production this year but this would be more than compensated by the cost factor, which is lower than our earlier forecast. We have largely maintained our FY13 estimate. Our SOP valuation is finetuned to RM11.22 from RM11.34 previously to incorporate a slightly lower price for plantation land in Kulai Besar of RM3.50 per sq ft against a projected RM5 earlier.

Source: OSK