Investment Highlights

• Maintain BUY on IJM Plantations (IJMP) with an unchanged fair value of RM3.00/share. We believe that the fall in IJMP’s share price presents a good opportunity to buy. We believe that CPO prices have bottomed and IJMP’s valuations are more palatable now.

• IJMP is currently trading at a FYE20F PE of 16.8x vs. TSH Resources’ FYE12/19F PE of 17.1x and Genting Plantations’ FYE12/19F fully diluted PE of 23.1x.

• We are keeping IJMP’s FY19F earnings forecast. Although we have reduced IJMP’s FFB production growth assumption from 10% to 7%, this is offset by a lower effective tax rate of 33% vs. 35% previously. IJMP’s effective tax rate is expected to be high in FY19F (FY18: 43%) due to adjustments for deferred tax losses in Indonesia.

• A bright spot in the CPO futures market is the price of CPO for delivery in March 2019. CPO futures price for March 2019 is RM2,364/tonne vs. the November delivery price of RM2,156/tonne. This indicates that there may be a recovery in CPO price from the end of 1Q2019 onwards underpinned by a slowdown in global palm production or pick-up in global demand.

• We understand that IJMP’s CPO production in Malaysia may reach its peak in November or December while output in Indonesia may reach its highest level in December 2018 or January 2019. We gather that currently, IJMP’s FFB production in Kalimantan is softening but will pick up again in 4Q2018.

• The issue of shortage of barges in East Kalimantan is expected to be resolved by 1Q2019 as palm supply starts to ease. The lack of barges has resulted in the shortage of storage space for palm oil. Hence, palm refiners in East Kalimantan have not been able to buy as much CPO from the millers as they usually can. This partly contributed to the downturn in CPO prices.

• There has not been enough storage in East Kalimantan as FFB production in the region has been extremely robust. We understand that the problem is more prevalent in East Kalimantan compared with other regions such as Central Kalimantan.

• Production costs are expected to rise in FY19F due to higher minimum wages, lower palm kernel credits and increased fertiliser price. IJMP’s production cost (all-in) is anticipated to rise from RM1,650/tonne in FY18 to RM1,800/tonne in Malaysia in FY19F. Production cost in Indonesia is envisaged to inch up from RM1,800/tonne in FY18 to RM1,850/tonne as higher costs are partly compensated by a rise in the volume of CPO production.

Source: AmInvest Research - 18 Oct 2018