Investment Highlights

• We are downgrading IJM Plantations (IJMP) to SELL from BUY with a lower fair value of RM1.52/share (vs. RM3.00/share previously). We have applied anFY20F PE of 22x to arrive at IJMP’s fair value instead of using RNAV as IJMP is no longer a takeover target.

• IJMP’s 9MFY19 core results were sharply below our earnings forecast and consensus estimates. We have reduced IJMP’s FY19F net profit by 73.6% to account for a weaker-than-expected plantation operating profit margin and lower FFB production growth of 4.8%.

• IJMP’s core net loss (ex-net forex gain of RM18mil) widened to RM20.0mil in 3QFY19 from RM5.6mil in 2QFY19 (ex-net forex loss of RM22.7mil). The QoQ decline in IJMP’s bottom line in 3QFY19 was dragged by the plunge in CPO price, which offset a 21.7% increase in FFB production.

• On a positive note, we believe that sales volume of IJMP’s CPO in Indonesia had recovered in 3QFY19 as the issue of shortage of barges in Kalimantan is easing. Sales volume of IJMP’s CPO output in Indonesia rose by 30.3% QoQ to 28,678 tonnes in 3QFY19.

• EBITDA of the Malaysia division improved to RM19.6mil in 3QFY19 from RM10.2mil in 2QFY19. The unit’s pre-tax swung to a profit of RM8.7mil in 3QFY19 from a loss of RM1.5mil in 2QFY19.

• FFB production of the Malaysia unit rose by 77.2% QoQ in 3QFY19. On a negative note, average CPO price realised slid by 13.5% to RM1,928/tonne in 3QFY19 from RM2,228/tonne in 2QFY19.

• The Indonesia unit recorded a higher EBITDA of RM24.8mil in 3QFY19 compared with RM4.3mil in 2QFY19. However on a pre-tax level, core losses of the Indonesia division widened to RM28.7mil in 3QFY19 from RM7.6mil in 2QFY19. We think that this was due to higher interest and depreciation expenses.

• Average CPO price realised in Indonesia was RM1,693/tonne in 3QFY19 vs. RM1,867/tonne in 2QFY19. The price differential between CPO in Malaysia and Indonesia narrowed to RM235/tonne in 3QFY19 from RM361/tonne in 2QFY19. FFB production in Indonesia eased by 9.8% QoQ in 3QFY19.

• Overall, IJMP’s FFB production rose by 2.8% YoY in 9MFY19. FFB output in Indonesia expanded by 13.3% YoY in 9MFY19 while FFB output in Malaysia slid by 8.3%. Indonesia accounted for 56.6% of IJMP’s group FFB production in 9MFY19.

Source: AmInvest Research - 27 Feb 2019