GENT PLANTATIONS BUY. Positioned for growth from Indonesia. Company report. (Maintained) Rationale for report: Company Update PLANTATION

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1 PLANTATION GENT PLANTATIONS (GENP MK, GENS.SI) 27 June 22 Company report Gan Huey Ling, CFA Positioned for growth from Indonesia Rationale for report: Company Update BUY (Maintained) Price Fair Value 52-week High/Low Key Changes Fair value EPS RM9.25 RM.65 RM9.84/RM6.57 Unchanged Unchanged YE to Dec FY FY2F FY3F FY4F Revenue (RMmil),336.5,289.5,427.9,78.5 Net Profit (RMmil) EPS (sen) EPS growth (%) 36.3 (.3) Consensus net (RMmil) DPS (sen) PE (x) EV/EBITDA (x) Div yield (%) ROE (%) Net gearing (%) na na na na Stock and Financial Data Shares Outstanding (million) Market Cap (RM mil) 7,8.9 Book value (RM/share) 4.26 P/BV (x) 2.2 ROE (%) 4.5 Net Gearing (%) na Major Shareholders Genting Bhd (55%) EPF (5%) Free Float (%) 45 Avg Daily Value (RMmil) 7.2 Price performance 3mth 6mth 2mth Absolute (%) Relative (%) Investment Highlights Maintain BUY on Genting Plantations Bhd (GenP), with an unchanged fair value of RM.65/share, which is based on a PE of 6x on FY3F EPS. In the past seven years, GenP s PE band ranged from a low of 5.2x to a high of 27.5x. Average PE was 5.9x. According to Bloomberg consensus estimates, GenP s FY3F PE of 4.2x is almost similar to IJM Plantations (IJMP) FY3F-FY4F PEs of 3x to 4x. Compared to IJMP, GenP started planting in Indonesia earlier. Hence, it has a larger size of planted areas in the country. GenP s planted areas in Indonesia amounted to almost 34,ha as at end-fy versus IJMP s 22,ha. We like GenP for its landbanking strategy. Upon completion of the 6:4 joint venture agreement for the acquisition of 74,ha of land in Central Kalimantan, GenP s landbank in Indonesia would be larger than Kuala Lumpur Kepong s (KLK). This would help sustain GenP s long-term profit growth. Operationally, GenP is expected to enjoy a double-digit percentage surge in FFB production in Indonesia in FY3F. At the group level (including Malaysia), we estimate GenP s FFB output growth at 4% for FY3F. Indonesia is envisaged to account for 2% of group FFB production in FY3F. Due to the jump in FFB output and completion of two palm oil mills in Kalimantan in 2HFY2, we anticipate losses in GenP s plantation division in Indonesia to decline in FY3F. The division could swing into profitability by FY4F. GenP s plantation operations in Indonesia recorded a loss of RM6mil in FY. Production costs of the plantation division in Malaysia are expected to average about RM,25/tonne in FY2F. Operating costs per tonne are envisaged to ease in the coming few quarters from QFY2 s high of RM,4/tonne-RM,5/tonne on the back of lower fertiliser application and higher palm oil production. GenP is anticipated to start development of the second phase of Johor Premium Outlet (JPO) by year-end. The second phase is expected to cost less than RM5mil as there would not be any land cost. Construction of the second phase of JPO should be completed by end-fy3f. There would be fewer than 8 outlets in the second phase of the JPO. PP2247/6/23(3238)

2 TABLE : VALUATION 22 JUNE 22 Malaysia comparisons PE (x) ROE (%) Dividend Yield (%) FY2F FY3F FY4F FY2F FY3F FY4F FY2F FY3F FY4F Large-caps (>RMbil) IOI Corporation KL Kepong Sime Darby Simple average Medium-caps (>RM3bil) Genting Plantations Kulim United Plantations Simple average Small-caps (>RMbil) IJM Plantations TH Plantations TSH Resources Sarawak Oil Palms Tradewinds Plantation Hap Seng Plantations Simple average Source: Bloomberg MAINTAIN BUY WITH UNCHANGED FAIR VALUE OF RM.65/SHARE We are keeping our BUY recommendation on Genting Plantations Bhd (GenP), with an unchanged fair value of RM.65/share. Our fair value of RM.65/share is based on a PE of 6x on FY3F EPS. We continue to like GenP for the long-term profit growth underpinned by the group s plantation operations in Indonesia. In Malaysia, plantation operations remain wellmanaged with production costs being one of the lowest in the industry. Dividend yields are not expected to be exciting as the group conserves cash for growth. We estimate gross DPS of 7 sen to 8 sen for FY2F-FY3F, which translate into yields of.8% to.9%. Risks to the group are its biotechnology and downstream divisions. There is a risk that the biotechnology division may not be able to successfully commercialise its findings, while the downstream plant in Lahad Datu might face challenging operating conditions when it starts operations. VALUATIONS ARE SLIGHTLY HIGHER THAN PEERS FY3F PE of 4.2x is palatable We believe that GenP s premium valuations are justified on the back of its landbanking strategy and future growth coming from Indonesia. According to Bloomberg consensus estimates, GenP s FY3F PE of 4.2x is roughly % above the simple average PE of the medium-cap plantation companies in Malaysia of 2.9x (see Table ). Against the large-cap planters, however, GenP is cheaper. The group s FY3F PE is 6% below the simple average FY3F PE of 5.x of the bigger plantation companies (see Table ) like Kuala Lumpur Kepong or IOI Corporation. GenP s PE valuation is similar to IJM Plantations (IJMP) FY3F-FY4F PEs of 3x to 4x (see Table ). Both GenP and IJMP are expected to experience robust growth from Indonesia in the future. The only difference is that GenP started planting in Indonesia earlier. Hence, GenP has a larger size of mature areas in Indonesia versus IJMP. However, IJMP is a purer plantation company compared to GenP. Apart from the biotechnology division and a downstream plant, GenP also has property operations. Additionally, GenP has share of profits from a retail premium outlet; i.e. Johor Premium Outlet. Seven-year average PE is 6x In the past seven years, GenP s PE band ranged from a low of 5.2x to a high of 27.5x (see Chart ). The group s average PE was 5.9x (see Chart ). AmResearch Sdn Bhd 2

3 TABLE 2 : COMPARISONS OF SIZE OF LANDBANK Total plantation landbank ha IOI 28,432 KLK 25,729 Kulim 79,9 Genting Plantations 239,725 IJM Plantations 92,877 TH Plantations 59,53 TSH Resources 94,99 Source: Companies, AmResearch Compared to five years ago, GenP is now a larger plantation company due to the expansion in its plantation landbank. WE LIKE GENP FOR ITS:- Landbanking strategy GenP has been slowly building up its landbank in Indonesia. In terms of the size of landbank in Indonesia, GenP would be larger than Kuala Lumpur Kepong (KLK) when the former s 6/4 joint venture for the acquisition of 74,ha of land in Central Kalimantan is completed in 2HFY2. Overall, GenP would have 239,725ha of land in total (see Table 2). Out of these, about 74,ha or 73% would be in Indonesia, while the balance 66,ha would be in Malaysia. Based on the total landbank size (Malaysia and Indonesia), GenP would be the second largest plantation company under our coverage. GenP s 239,725ha would be bigger than IOI Corporation s 28,432ha and just 4% smaller than KLK s 25,729ha (see Table 2). Apart from the proposed acquisition of 74,ha of land in Central Kalimantan, GenP is also working to complete the acquisition of 7,36ha of land in West Kalimantan. Double-digit percentage growth in FFB production in Indonesia in FY3F GenP s FFB production in Indonesia is expected to grow more than % in FY3F underpinned by an increase in mature areas. Growth in mature areas is envisaged to be underpinned by new plantings carried out from FY8-FY9. As at end- FY, the size of GenP s immature areas in Indonesia was 27,583ha. If half of these were to enter the mature stage, then GenP s mature hectarage would increase by more than % in FY3F. On a group basis; i.e. including plantation operations in Malaysia, we forecast GenP s FFB output growth at 4% in FY3F and 23% in FY2F. Declining losses in Indonesia underpinned by two new palm oil mills We reckon that losses in GenP s plantation division in Indonesia would be smaller at RM5mil in FY3F. By FY4F, the plantation division in Indonesia is envisaged to be profitable. Losses at GenP s plantation division in Indonesia are expected to narrow in FY3F not only underpinned by the increase in the volume of palm oil production but also by the completion of two palm oil mills in 2HFY2. These palm oil mills are located in Ketapang, West Kalimantan and Kapuas, Central Kalimantan. The size of each palm oil mill is about 45 tonnes/hour. Currently, GenP is selling FFB to third party millers in Indonesia. In FY, losses at the Indonesia division were RM5.9mil while in FY, they were RM4.7mil. Efficient production of palm oil GenP s production cost is forecast at RM,25/tonne in FY2F, which is the same as KLK s operating cost/tonne. In spite of rising production costs, GenP remains one of the more efficient plantation companies in Malaysia. GenP s production cost of RM,25/tonne for FY2F is envisaged to be 7% higher than FY s RM,64/tonne due to a climb in labour and fertiliser costs. Labour costs are envisaged to rise 5% in FY2F due to the implementation of the minimum wage of RM65/month and increment of RM2/month late last year. Labour is estimated to account for 35% of total production costs. AmResearch Sdn Bhd 3

4 Fertiliser costs are anticipated to climb 5%-2% in FY2F on the back of rising crude oil prices. After labour, fertiliser is the second largest cost component, accounting for 25% of production costs. In QFY2, GenP s production cost was high, between RM,4/tonne-RM,5/tonne. This is expected to decline in the coming quarters as the application of fertiliser tapers off and volume of palm oil production improves. RISKS Biotechnology division to start commercialising finds in FY3F/FY4F The timeline for the commercialisation of the biotechnology division s R&D findings is drawing near. It remains to be seen if the biotechnology division can start selling its products by next year. The division is expected to record losses of RM3mil to RM6mil annually. So far, GenP has spent about RM3mil on the biotechnology division. We believe that there would not be any impairments or provisions for the biotechnology division in the short-term. In FY, GenP took over the remaining stake in one of ACGT Sdn Bhd s subsidiary, which valued the group at RM324mil. Still negotiating on downstream products GenP is still negotiating with the relevant parties on its potential venture into high value-added downstream products. The relevant parties include technology providers and off-takers. We reckon that operating conditions in the downstream plantation industry; e.g. refining or oleochemical, are challenging. Operating margins are thin. Demand for oleochemical products is also weak due to the uncertainties in the global economy. Additionally, there is an oversupply of capacity in the global oleochemical industry. Construction of the second phase of JPO should be completed by end-fy3f. Second phase of JPO is envisaged to cost less than RM5mil, which was the cost of the first phase. There would be fewer than 8 outlets in the second phase of JPO. Although no numbers were disclosed, we understand that Singaporeans account for a significant portion of visitors at JPO. Average spending of the Singaporeans is also larger than the Malaysian shoppers. JPO is profitable We estimate GenP s share of profits in JPO at RM4mil for FY2F. In QFY2, we believe that the group s share of profits in JPO was RMmil to RM2mil. BALANCE SHEET IS CLEAN Net cash of more than RM7mil forecast for FY2F GenP s balance sheet is healthy. We forecast GenP s net cash to expand from RM59mil as at end-fy to RM736mil as at end-fy2f. FY2F capex assumed at RM27mil We have assumed a capex of RM27mil for FY2F. This is expected to comprise maintenance capex of RM5mil (FY: RM2mil) and new planting expenditure of RM2mil (FY: RM23mil). Our estimate of new planting expenditure is based on a hectarage of 8,ha and cost of US$5,/ha. GenP s operating cashflows are expected to range between RM45mil and RM52mil in FY2F to FY3F. This, coupled with our capex assumptions of RM27mil and RM22mil for FY2F and FY3F, respectively, would translate into free cash flows of 24 sen/share in FY2F and 4 sen/share in FY3F. Recall that GenP acquired GBD Holdings Ltd for US$3.3mil (RM42mil) in May 2. Currently, the plant has a biodiesel production capacity of 2, tonnes/year. It is not known how much GenP would have to spend additionally to retro-fit the plant to produce the value-added products. JPO TO EMBARK ON SECOND PHASE OF DEVELOPMENT Development of second phase to start by year-end Due to the success of the first phase of Johor Premium Outlet (JPO), GenP is expected to start on the development of the second phase by year-end. AmResearch Sdn Bhd 4

5 TABLE 3 : FINANCIAL DATA Income Statement (RMmil, YE 3 Dec) F 23F 24F Revenue 988.6,336.5,289.5,427.9,78.5 EBITDA Depreciation (32.7) (44.3) (43.4) (49.8) (56.) Operating income (EBIT) Other income & associates Net interest Exceptional items Pretax profit Taxation (5.5) (58.7) (53.6) (77.7) (89.9) Minorities/pref dividends. (.6) (.7) (.8) (.9) Net profit Core net profit Balance Sheet (RMmil, YE 3 Dec) F 23F 24F Fixed assets ,38.4,82.3 Intangible assets Other long-term assets,442.8,63.4,749.3, ,28.5 Total non-current assets 2,43. 2,699. 2,94.6 3,3. 3,34.8 Cash & equivalent 755.7,6.9,66.5,345.9,583.5 Stock Debtors Other current assets Total current assets,8.8,46.9,479.7,685.8,975.6 Creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders' funds 2, , ,54.6 3,9. 4,334.7 Minority interests BV/share (RM) Cash Flow (RMmil, YE 3 Dec) F 23F 24F Pretax profit Depreciation Net change in working capital 32.8 (78.4) (52.4) (8.5) (97.6) Others (3.9) (3.8) (3.3) (3.3) (32.3) Cash flow from operations Capital expenditure (264.) (243.9) (27.) (22.) (22.) Net investments & sale of fixed assets Others (94.3) (9.2) Cash flow from investing (358.) (352.3) (27.3) (28.) (28.6) Debt raised/(repaid) Equity raised/(repaid).4 (.2)... Dividends paid (56.) (77.6) (97.5) (33.) (39.6) Others (.2) (7.)... Cash flow from financing (94.4) (33.) (39.6) Net cash flow Net cash/(debt) b/f ,7.,66.5,345.9 Forex (.).... Net cash/(debt) c/f 755.5,7.,66.5,345.9,583.5 Key Ratios (YE 3 Dec) F 23F 24F Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) na na na na na Effective tax rate (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) Source: Company, AmResearch estimates AmResearch Sdn Bhd 5

6 CHART : PE BAND Source: Bloomberg 4. CHART : PB BAND CHART 3.2 ) (x s Avg s.8. F e b M a y A u g N o v F e b M a y A u g N o v F e b 2 M a y 2 Published by AmResearch Sdn Bhd (3355-P) (A member of the AmInvestment Bank Group) 5th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 52 Kuala Lumpur Tel: (3) (research) Fax: (3) Printed by AmResearch Sdn Bhd (3355-P) (A member of the AmInvestment Bank Group) 5th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 52 Kuala Lumpur Tel: (3) (research) Fax: (3) The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 6