GENP’s FY22 results came below expectations due to a weak 4QFY22. Fourth quarter’s FFB output held well QoQ and YoY while CPO price was weaker than expected but it was high cost that dampened upstream earnings. With margins expected to stay under pressure from easier CPO prices and sticky costs, we cut our FY23F net profit by 8%, reduce our TP by the same percentage to RM5.50 (from RM6.00) but maintain our MARKET PERFORM call.
4QFY22 core net profit inched up QoQ to RM72m despite weaker plantation earnings, being bolstered by firm contributions from downstream and property segments. FFB output was flattish in 4QFY22 while CPO price was mix averaging RM3,620/MT (+7% QoQ, - 10% YoY). High production cost was the issue, hovering at RM2,600 per MT of CPO. FY22 CNP rose 5% YoY on higher downstream and property contributions as plantations PBT edged down despite higher CPO prices. FFB output was essentially flat but production cost rose. Downstream fared better from higher refining margins and biodiesel volume while property earnings surged YoY on post-Covid recovery in both property development and the Premium Outlets JV. GENP ended FY22 with flattish net debt of RM854m or at 16% net gearing. A final dividend of 4 sen and 15 sen special dividend was announced, bringing FY22 NDPS to 34 sen (+13% YoY).
CPO price outlook: Lower palm oil prices are expected for 2023 as edible oil supply improves as US soyabean oil is entering the market while Latin America soyabean harvest is ongoing. Nevertheless, range bound CPO prices of RM3,500-4,000 per MT for 2023 is expected as edible oil demand should also recover as: (a) post-Covid demand continues to normalize, (b) the largest edible oil user (c.40m MT), has begun relaxing its zero-Covid policy and demand for biodiesel looks set to grow, led by US, Indonesia and Brazil. Indonesia (3rd largest biodiesel market) raised its B30 blend to B35 on 1 Feb 2023 while Brazil is expected to raise its B10 blend in stages to B15 by end-2023. Consequently, Indonesia is estimated to require 1-2m MT of palm oil for its B35 blending while Brazil requires up to 0.5-1m MT of soyabean oil to reach its B15 blend.
Weaker FY23-24F earnings. We expect weaker forward earnings on softer palm oil prices of RM3,800/3,500 per MT for FY23-24. Production cost is also expected to stay high as fertiliser prices are still elevated despite having eased 15-20% from the Apr 2022 peak levels. On average, 2022 fertiliser cost is still 70% higher YoY and 3x more than 2020.
Downgrade FY23F net profit by 8% and TP from RM6.00 to RM5.50 but maintain MARKET PERFORM. Our TP is based on FY23F EPS against 14x target PER which is a 10% discount to larger integrated peer PER of 15x. No ESG premium is imputed as we rate GENP at 3- star (see Page 3). The group’s young estates in Indonesia and recovering property earnings and higher NDPS are welcomed positives but its plantations margins are still under some pressure and rangebound share price from our new TP compelled us to keep our MARKET PERFORM call intact.
Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) production cost inflation.
Source: Kenanga Research - 23 Feb 2023
