Genting Plantations’ still strong, but hit by weak dynamics

KUALA LUMPUR: Genting Plantations Bhd’s (Genting Plantations) fundamentals has been viewed as still sound but weak industry dynamics are clouding the company’s prospects.

In a report, the research arm of AmInvestment Bank Bhd (AmInvestment) said, due to languishing crude palm oil (CPO) prices, it believed that Genting Plantations would not be able to trade at premium valuations anymore.

“We have reduced Genting Plantations’ FY18F net profit by 7.8 per cent to account for a weaker CPO price assumption of RM2,450 per tonne compared with RM2,650 per tonne previously.

“We estimate that for every RM100 per tonne change in CPO price, Genting Plantations’ net profit would increase or decrease by four per cent,” it added.

In spite of a lower CPO price, AmInvestment pointed out that Genting Plantations’ core net profit is

expected to inch up by 1.1 per cent in FY18F (ex-land disposal gain of RM10.6 million in FY17) as earnings from Johor and Genting Highlands Premium Outlets improve by 30 per cent and a FFB production growth of 19 per cent help offset a 9.8 per cent decline in CPO price.

It also highlighted that Genting Plantations’ balance sheet is clean.

“Net gearing stood at 37 per cent as at end-December 2017. The group has gross cash of RM1.58 billion as at end-FY17, which would rise to more than RM2.2 billion in FY19F due to growing free cash flows and proceeds from the conversion of warrants in June 2019,” it added.

Meanwhile, the research team forecast Genting Plantations’ FFB production to increase by 19 per cent in FY18F compared with 16.7 per cent in FY17.

“The group’s FFB output growth was 19.6 per cent year-on-year (y-oy) in 1QFY18. The robust 19 per cent increase in Genting Plantations’ FY18F FFB production is expected to be underpinned mainly by a 42 per cent rise in output in Indonesia,” it added.

As for FFB production in Malaysia, it envisaged production to be flat at 1.2 million tonnes in FY18F due to replanting activities of 2,000 hectare (ha) to 3,000ha.

Aside from that, it noted that recurring income for Genting Plantations is expected to come from Johor and Genting Highlands Premium Outlets.

“We forecast Genting Plantations’ 50 per cent share of net profit in the premium outlets to improve by 30 per cent to RM39.3 million in FY18F,” it said.

Since the opening of Johor Premium Outlet in late FY11 and Genting Highlands Premium Outlet in mid-FY17, Genting Plantations’ 50 per cent share of net profit in the premium outlets has jumped fromRM1.1 million to RM30.2 million in FY17.

All in, AmInvestment downgraded its call on the stock to ‘hold’.