Genting Plantations - Cushioned by Indonesia Buy

- Affirm BUY on Genting Plantations Bhd (GenP) with an unchanged fair value of RM10.65/share. Our fair value implies an FY13F PE of 16x. GenP’s PE ranged from a low of 5x to a high of 28x in the past seven years. The group’s average PE was 16x. 

- We have revised downwards GenP’s FY12F earnings by 4.5% to account for a relatively flat FFB production growth in FY12F. 

- Compared to other plantation companies, the YoY fall in GenP’s net profit in 1QFY12 was not as severe. The group’s net profit was partly supported by a 3% YoY increase in FFB production in 1QFY12. 

- The expansion in GenP’s oil palm production in Indonesia helped compensate for an estimated 2% YoY decline in FFB output in Malaysia in 1QFY12. GenP’s plantation division in Indonesia accounted for 5% of group FFB production in 1QFY12.  

- In spite of rising palm oil production from Indonesia, GenP’s average CPO price realised of RM3,179/tonne was still close to MPOB’s (Malaysian Palm Oil Board) average spot price of RM3,190/tonne in 1QFY12. Comparing 1QFY12 against 1QFY11, average CPO price realised fell 13.7% from RM3,682/tonne to RM3,179/tonne. 

- GenP has revised its forecast of FFB production growth for FY12F from 8% to 9% to zero. FFB output in Malaysia is expected to remain weak until 2HFY12. This is due to lag impact from the hot and dry weather, which took place in early-FY10. Overall, FFB output in Malaysia is estimated to decline 6% in FY12F.    

- However, GenP’s FFB production in Indonesia is envisaged to grow at a robust rate of 5% to 6% in FY12F. This is underpinned by an increase in mature areas. Mature areas are anticipated to expand to 17,000ha by endFY12F from 6,294ha at end-FY11.   

- GenP’s cost of production is expected to climb 17% from RM1,064/tonne in FY11 to RM1,250/tonne in FY12F. The increase in cost of production will be due to higher wages and fertiliser costs. Fertiliser costs rose 15% to 20% YoY in 1QFY12. 

- GenP’s cost of production of RM1,500/tonne in 1QFY12 is anticipated to decline in the coming few financial quarters underpinned by higher volume of production and flat fertiliser costs. Fertiliser costs in 2HFY12 are envisaged to be the same as 1HFY12.  

Source: AmeSecurities