Maintain SELL, new SOP-based TP of MYR5.80 from MYR7.35, 13% downside. Genting Plantations remains expensive compared to its peers – this counter is trading at 18x FY23F P/E, vs its big-cap peer range of 14- 16x. Despite making better ESG disclosures for the past years, GENP has not seen improvements in GHG emission intensity or energy efficiency, thereby warranting our 12% ESG discount.
CPO prices have fallen on the back of the unwinding impact of Indonesia’s export ban, as well as recession fears which weighed down commodity prices in general. We believe the price decline may be slightly overdone, having fallen 44% in seven weeks – much more than the declines in soybean, crude oil and wheat prices (down 31%, 17% and 16%). While regulatory risks still exist, particularly for players in Indonesia, supply concerns are likely to continue plaguing the sector for the rest of 2022 – in view of the logistics backlog in Indonesia and the labour shortages in Malaysia. That said, if these issues are resolved by end- 2022, and if Ukraine is able to export its oilseed products as per the grains deal agreement signed, 2023 should continue to be a better year for supply, and prices should remain under pressure.
ESG concerns remain, but may have taken a backseat. However, the ESG discounts we previously assigned to valuations are still in place. We have reassessed our ESG scores by relooking at the progress made by the industry, identifying shortcomings and any room for improvement. From our analysis, we highlight that better disclosure on ESG-related information has been made over the years, but progress in mitigating related issues is rather slow. As such, we have made some upward revisions to the ESG scores of some planters that have made progress – while highlighting that several peers have remained relatively stagnant in their ESG efforts, while others have even reduced disclosures.
We tone down CPO price assumptions. We continue to expect stock levels to remain tight for the next 2-3 months, possibly until end-3Q, which would provide support for CPO prices. We trim CPO price assumptions for 2022 to MYR5,100/tonne (from MYR5,300/tonne). In 2023, as fundamentals continue to improve – assuming labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported, CPO prices could decrease even more. However, support from a ramp-up in biodiesel mandates and discretionary biodiesel demand coming back would keep CPO prices above MYR3,000/tonne in the medium term. We cut our 2023 estimate to MYR3,900/tonne (from MYR4,300/tonne). Our MYR3,500/tonne assumption for 2024 remains unchanged. As a result, we cut GENP’s FY22-24F earnings by 2-23%.
SELL, with a lower TP of MYR5.80 (from MYR7.35) based on a FY23F P/E target of 17x for its plantation business and 85% discount to RNAV for its property unit. Our TP includes a 12% ESG discount based on its ESG score of 2.4, which is below the country median of 3.