Genting Plantations - A Weak Set of Results to BUY Into

We are maintaining our BUY call for Genting Plantations with FV unchanged at RM11.22. As the 3Q results could be substantially stronger with seasonal recovery in production and lower fertilizer application, we recommend that investors buy into the weak 2Q results. We see multiple stock price catalysts in the form of higher CPO price next year, improving contribution from its Kalimantan operation, continuous value creation at its Indahpura land and commercialization of its biotech division. We also like its good geographical diversification across East & West Malaysia and Indonesia.

Weak but not surprising. Genting Plant’s annualized 1H core earnings came in 26.3% below our full year forecast of RM393.1m and and 32.0% below consensus expectation of RM426.2m. Compared to last year, Genting Plant’s 1H core earnings were 38.2% lower. This was not surprising as its 13.2% decline in FFB production as well as the weaker CPO price this year, are both known factors.

Clearer production trend. Management reiterated that there are good chances that 2H production will match last year’s 2H production, which will mean that Malaysian estates’ FFB production will still be 6 – 7% lower. (see our note on Genting Plant dated 7 August 2012). The lower FFB production so far has been partly mitigated by better oil extraction rate, which improved by some 12% from last year. However, management also guided that Indonesian estates’ FFB production will be less than the 100k tonnes it earlier expected. With the delay in mill commissioning, Indonesia’s FFB tonnage will likely be around 20% lower than earlier expected.

Maintaining forecast. We are not changing our FY12 forecast at this juncture, which stands at 7.8% lower than consensus. We believe 2H will be significantly better. Should 2H production matches that of 2H last year, that will mean 2H production will be 32% higher than 1H. (In 2007, its 2H production was 37% higher than 1H while in 2009 it was 30% higher.) On top of that, fertilizer application will be lower in the 2H as Genting Plant has already applied 55% of its full year fertilizer application in the 1H. We are also maintaining our forecast for FY13 at RM457.5m, which is significantly lower than consensus at RM491.1m despite our bullish CPO price assumption of RM3,500 per tonne next year.

Still a BUY. Based on our forecast, Genting Plant trades at 18.0x FY12 and 15.5x FY13 earnings, which look fair. However, PE alone does not capture Genting Plant’s true value as the company owns some 5000 acres of land with development potential in Iskandar Johor. We estimate that the parcel of land is worth close to RM2 per Genting Plant share. Our SOP FV of RM11.22 captures this asset’s value.

Source: OSK