KUALA LUMPUR: Genting Plantations Bhd’s rosy upstream outlook in the near-term is likely to be driven by its young tree profile in Indonesia, despite aggressive replanting in Malaysia,

       According to Kenanga Research, the group’s management is keeping its production growth guidance between 3% and 5% for financial year ending Dec 31, 2021 (FY21).

       The production growth guidance was also in line with the research house’s FY21 forecast of 5%.

       Kenanga Research also believed that the challenging outlook for Genting Plantations’ downstream sector would likely be offset by the stronger upstream sector.

       The planter’s downstream sector is expected to remain challenging given the wide palm oil gas oil spread of US$450 (RM1,901.70) per tonne compared with its three-year average of US$150 (RM633.90) per tonne, according to the research house.

       A plantation worker uses a harvesting sickle to harvest a palm oil bunch at the Genting Tanah Merah Estate, operated by Genting Plantations Bhd., in Johore, Malaysia

       “However, the weak downstream outlook will be overshadowed by the stronger upstream.

       “While the view is that prices are likely to remain elevated when compared with 2020, there are more downside risks than upside to current crude palm oil prices,” it said. Meanwhile, Kenanga Research said Genting Plantations’ cost of production could increase due to the higher fertiliser costs and potential higher fertiliser application rate in the second quarter and third quarter of FY21 following lower application due to the wet weather in the first quarter.

       However, Genting Plantations is looking to keep its FY21 cost of production below the FY20’s level of around RM1,800 per tonne. Moving forward, the group is open to merger and acquisition (M&A) possibilities and has received proposals from time to time. “M&A opportunities are on the cards with a war chest of around RM800mil, while an economic reopening together with the new theme park will benefit its premium outlets,” added the research house.

       Kenanga Research believed that M&A opportunities would boost Genting Plantations’ planted area and production growth.

       “We think the group is more likely to be interested in the estates in west and central Kalimantan where its Indonesian estates are concentrated.Notably, the group’s latest upstream acquisition in 2017 was also in south Kalimantan, at an enterprise value per planted hectare of around RM65,000.

       On the environmental, social and governance (ESG) front, Kenanga Research said the group’s improvements included greater disclosure for its Indonesia division, such as traceability and land area under sustainable certification.

       Kenanga Research is keeping a “outperform” call on Genting Plantations with rolled-over FY22 estimate target price of RM7.65. “While we roll over valuations, we ascribed 10% and 20% lower valuations to its upstream and downstream divisions due to the ESG concerns.”

       The research house also maintained its FY21and FY22 estimates core net profit unchanged as the group’s updates are consistent with its expectations.