Genting Plantations Bhd 
(Aug 26, RM9.24)
Maintain buy with a lower target price (TP) of RM10.13: Genting Plantations Bhd reported a net profit of RM40 million for its second quarter ended June 30 of financial year 2015 (2QFY15). The quarterly net profit dropped 42.2% year-on-year (y-o-y) and 24% quarter-on-quarter (q-o-q). By stripping out the forex loss from its US dollar-denominated borrowings, the core net profit for 2QFY15 stood at RM45.3 million, declining 33.8% q-o-q and 47.1% y-o-y on weaker performances in both its plantations and property segments. 

For the cumulative six months ended June 30 (6MFY15), the reported net profit of RM92.7 million was 45.6% lower y-o-y while revenue was 9.1% lower than a year ago. The 6MFY15 core net profit for the group after stripping out the forex loss was RM113.8 million, decreasing 31.9% y-o-y. The core net profit was below expectations by meeting only 32% to 34% of our and consensus expectations. The negative deviation can be attributed to the weaker-than-expected crop production. 

Profit before tax (PBT) of the plantations division dropped 23% y-o-y, owing to declining crude palm oil (CPO) prices, which was more than enough to offset the higher production of fresh fruit bunch (FFB) which grew 8.2% y-o-y. Average CPO selling prices in 2QFY15 dropped 16% to RM2,171 per tonne from RM2,583 per tonne a year earlier. On the other hand, the PBT of the property division tumbled 76% y-o-y on softer property sales. 

The group’s 2QFY15 core net profit dropping 33.8% is due to weaker performance in the plantations division, as the higher earnings contribution from Malaysian operations was offset by weaker contribution from Indonesian operations. The PBT of local operations increased 14% q-o-q,as FFB production improved on seasonal factors, mitigating the adverse impact of falling CPO prices. Meanwhile, Indonesian operations registered a weaker performance as heavy rainfall reduced FFB harvesting. On the other hand, PBT of the property division was down 87% q-o-q as divestment of the Genting Permaipura Golf Course Bhd’s operations boosted the earnings of the division in the previous quarter. 

For cumulative 6MFY15, core net profit was 31.9% lower than a year earlier, mainly due to the weaker performance by the plantations division as FFB production was lower than expected while the property division reported a slight improvement in earnings. PBT of the plantations segment dropped 30.7% y-o-y on the back of lower CPO prices. CPO prices in 6MFY15 dropped 16% y-o-y to RM2,206 per tonne. 

Meanwhile, FFB production of the group was lower-than-expected, growing by a marginal 0.9% y-o-y as impact of the drought in the February to April period hurt crop production in Sabah estates. Nevertheless, management indicated production is recovering as the weather imrpoves, with management looking at a FFB growth rate of about 7% in FY15. 

The group has declared a net dividend of 2.5 sen per share. We slashed our earnings forecasts by 13% to 24% for FY15 to FY17 to factor in the weaker-than-expected FFB production. We maintain “buy” with a lower TP of RM10.13 based on sum-of-parts valuation. Our TP implies a price-earnings ratio (PER) of 21 times of its FY16 earnings per share. We continue to like Genting Plantations for its strong fundamentals. The group is reaping the fruit of its Indonesian ventures as its existing harvesting areas progress into higher-yielding brackets. This would translate into sustainable production growth going forward. — JF Apex Securities Bhd, Aug 26

This article first appeared in digitaledge Daily, on August 27, 2015.