Genting Plantation - OUTPERFORM - Expanding landbank aggressively by 45%

Stock Name: GENP
Company Name: GENTING PLANTATIONS BERHAD

Research House: KENANGA

Price Call: BUY

Target Price: 10.70

News 

- Entered into a joint venturewith Global Agrindo Investment (GAI) to develop 74,390 ha of plantation land inCentral Kalimantan, Indonesia.

- Genting Plantation (GENP) willpay US$66m to GAI. Another US$50m will be injected into the JV via subscriptionof new shares.

- GENP will have an effectivestake of 60% in the Indonesian subsidiary. (Refer Page 2).

- Out of the total 74,390 ha ofland, 18,345ha (or 25%) of it has been planted. 4,195 (or 23%) of the plantedarea are under plasma scheme.

Comments 

- Positive on the deal. Totalplantation landbank will increase significantly by 45% to 239,950ha. GENP'stotal landbank will then overtake IOI's total landbank of 179,974ha to become Malaysia'sthird largest plantation company by landbank size behind SIME (873,222 ha) andKLK (250,729 ha).

- Planted area will also jump 20%to 111,929 ha.

- The deal's effective landpricing of c.RM7,800/ha (Refer Page 2) seems fair as 25% of the land has beenplanted. We gather that the latest greenfield plantation land deals in East Kalimantanwere transacted at the range of RM541/ha - RM1276/ha.

Outlook 

- Long term growth is secured as53% of its total landbank is now still unplanted (previously 43%).

Forecast

 - Step up FY14E-FY16E earnings by 5%-8% as a resultof 6%-10% increase in FFB production. 

- FY12E-FY13E earnings are leftunchanged as we expect the land to only start bearing fruits from FY14Eonwards. Although  25% of the total area hasbeen planted, we think the oil palm trees there is still immature as PTGAL (thesubsidiary who owns the land) is still reporting net loss of RM1.6m for FY10.Oil palm tree usually starts to produce FFB at 3.5 years old.

Rating  UPGRADE TO OUTPERFORM

- With the big jump in  its total landbank, we expect the stockvaluation to rerate closer to the current big cap planters Fwd PER of 17.0x.

Valuation  

- Raising our TP to RM10.70(previously RM9.90), based on higher PER of 16.4x (previously 15.2x) on ourunchanged FY12E EPS of 65.3 sen.

- We have applied 1 StandardDeviation above its average Fwd PER to arrive at a 16.4x Fwd PER (previously15.2x @ +0.5SD), which is higher than its peers' +0.5SD, given more sizeable landbankwith higher long term FFB growth potential.  

Source: Kenanga