Investment Highlights

• We believe that IJM Plantations (IJMP) is a take-over target. Hence, we are keeping our BUY recommendation on IJMP with an unchanged fair value of RM3.00/share. Our fair value is based on a 15% discount to IJMP’s RNAV of RM3.15/share.

• We have slashed IJMP’s FY19F net profit by 74.3% to account for a higher depreciation expense and lower plantation gross profit margin. We have also revised our CPO price assumption for IJMP downwards from RM2,450/tonne to RM2,250/tonne for FY19F. IJMP’s depreciation expense has turned out to be higher than expected under the new MFRS141 accounting standard.

• We have also reduced IJMP’s FY20F net profit by 41.7% to account for a weaker plantation gross profit margin and lower average CPO price of RM2,300/tonne vs. RM2,500/tonne previously.

• IJMP’s 2QFY19 core results (ex-unrealised forex losses of RM22.7mil) were poor. The group recorded a core net loss of RM5.6mil in 2QFY19 dragged by pre-tax losses in the Malaysia and Indonesia units.

• Although the Malaysia unit was profitable on the EBITDA level, the division registered a pre-tax loss of RM1.5mil in 2QFY19 due to a high depreciation expense. EBITDA of the Malaysia unit slumped by 37.1% QoQ to RM10.2mil in 2QFY19 dragged by a 29.8% drop in sales volume.

• The Indonesia division recorded a core pre-tax loss of RM7.6mil in 2QFY19 as sales volume of CPO shrank by 10.2% QoQ. Although FFB production expanded by 8.2% QoQ in 2QFY19, sales volume of CPO fell. We believe that IJMP has not been able to sell some of its CPO due to a shortage of barges or vessels in Kalimantan.

• Comparing 1HFY19 against 1HFY18, IJMP’s FFB production edged down by 3.6%. FFB output in Indonesia climbed by 9.7% YoY in 1HFY19 while in Malaysia, FFB production was 19.7% lower. Indonesia accounted for 62.4% of group FFB production in 1HFY19.

• Average CPO price in Malaysia declined by 14.4% from RM2,718/tonne in 1HFY18 to RM2,326/tonne in 1HFY19. Average CPO price in Indonesia skidded by 19.1% from RM2,470/tonne in 1HFY18 to RM1,998/tonne in 1HFY19. Price differential between CPO in Malaysia and Indonesia widened from RM248/tonne in 1HFY18 to RM328/tonne in 1HFY19.

Source: AmInvest Research - 27 Nov 2018