Genting Plantations Bhd
(June 25, RM10)
Recommend hold with a target price of RM10.90: Having expanded aggressively in Indonesia since 2007, Genting Plantations’ crude palm oil (CPO) output is forecast to expand by a 12% compound annual growth rate (CAGR) over the next three years. Earnings are likewise expected to expand by a 20% CAGR. For its long-term strategy, Genting Plantations has concurrently embarked upon improving its planting material through genome filtering. The group also recently undertook downstream projects through partnerships with Musim Mas Group and Elevance Renewable Sciences to produce high value added olefin products.

Sabah, where the majority of Genting Plantation’s mature Malaysian estates are located — has been dry year-to-date; and is forecast to book flat fresh fruit bunch yields. This, combined with lower spot CPO prices, Indonesia’s planned CPO export levy and forecast foreign exchange losses, will adversely impact the group’s bottom line this year. 

We expect Genting Plantations to book property earnings before interest and tax contribution of RM90 million this year and RM75 million next year, primarily from new launches, with industrial land sales expected to dissipate. We have not imputed contribution from the planned construction of its second premium outlet in Genting Highlands, scheduled for completion  in late 2016.  

Persistent weakness in crude oil prices and China’s decelerating gross domestic product remain the biggest challenges to CPO prices. But we believe any near-term weakness should be viewed as an opportunity to collect the stock for its long-term earnings outlook. A strong recovery in CPO prices would lift the share price above our fair value, and vice versa. — AllianceDBS Research, June 25

This article first appeared in The Edge Financial Daily, on June 26, 2015.