Indonesia to drive Genting Plantations growth

PETALING JAYA: Genting Plantations Bhd’s earnings growth for the financial year ending Dec 31, 2023 (FY23) will likely be driven by its plantation operations in Indonesia and non-plantation businesses amid a still-challenging environment.

The company is expected to face headwinds in the year ahead, as softer crude palm oil (CPO) prices and higher production costs could continue to weigh on its margins.

According to Kenanga Research, CPO prices are expected to consolidate around RM3,500 to RM4,000 per tonne in 2023.

The prices have been on a downtrend since peaking at more than RM7,000 per tonne in the second quarter of 2022 (2Q22).

“Improving contributions from its Indonesian estates as well as continual recovery from non-plantation businesses are key to Genting Plantations’ FY23 earnings as CPO prices consolidate around RM3,500 to RM4,000 per tonne into 2023,” the brokerage wrote in its report yesterday.

“While expansion via mergers and acquisitions cannot be ruled out, we suspect the group is more likely to focus on improving its plantation operations, especially in Indonesia where land issues and investments in better infrastructure and new mills are still required,” it added.

Kenanga Research cut its target price for Genting Plantations to RM6 from RM7.50 after reducing its earnings forecast for the plantation company. The brokerage also downgraded its recommendation for the counter to “market perform” from “outperform”.

It noted that Genting Plantations’ core net profit of Rm398mil for the first nine months of FY22 came in at 78% of its full-year forecast and 80% of consensus FY22 estimate.

“However, we consider the results below expectation, as we expect a weaker 4Q22 ahead. The variance against our forecast came largely from lower CPO prices realised and higher production cost,” Kenanga Research said.

It downgraded its FY22-FY23 core earnings per share for Genting Plantations by 10% to 20% to 56.6 to 44.3 sen due to weaker upstream earnings, as softer CPO prices and higher production cost erode margins.

Similarly, Hong Leong Investment Bank Research (HLIB) also lowered its FY22-FY23 core net profit forecast for Genting Plantations by 5.2% to 15.1%. This was mainly to account for lower CPO price assumptions, a lower fresh fruit bunch (FFB) yield assumption for FY22, and a lower CPO production cost assumption.

The brokerage’s forecast for FY24, however, was raised by 10.8% as it lowered its CPO production cost assumption and fine-tuned its FFB yield assumption. HLIB maintained its “buy” rating on Genting Plantations, with a lower sum-of-parts-based target price of RM7.37, compared with RM7.75 previously.