Investment Highlights

• Maintain SELL on IJM Plantations (IJMP) with a lower fair value of RM1.41/share (vs. RM1.52/share previously). Our fair value for IJMP is based on an FY20F PE of 22x. We have reduced IJMP’s FY20F net profit by 18.7% to account for a weaker gross profit margin.

• We believe that IJMP’s plantation cost per tonne would only start declining from FY22F onwards when the group reaches the optimum FFB yield of 22 tonnes/ha.

• Hence in the coming two years, its plantation cost per tonne would still be high. This is due to maintenance and upkeep costs for young mature oil palm trees in Indonesia (from new plantings) and young mature areas in Sabah (from replanting).

• IJMP’s young mature areas (four to seven years old) are estimated to account for 70.4% of total planted areas in Indonesia. In Malaysia, young mature areas are about 12.1% of total planted areas. IJMP’s mature areas are expected to increase by 1,000ha in Indonesia in FY20F.

• We reckon that IJMP’s production cost (all-in) in Malaysia would be RM1,800/tonne in FY19E compared with RM1,650/tonne in FY18. Production cost (all-in) in Indonesia is expected to increase to RM2,000/tonne in FY19F from RM1,800/tonne in FY18.

• In FY20F, we see all-in production cost in Malaysia to be higher at RM1,850/tonne while in Indonesia, production cost is envisaged to remain flat at RM2,000/tonne.

• Operationally, we have assumed FFB production growth of 4.8% in FY19E and 13.2% in FY20F. The increase in IJMP’s FFB production in FY20F is anticipated to be driven mainly by a recovery in FFB yield in Sabah. IJMP’s FFB yield in Sabah may improve to 22 tonnes/ha in FY20F from about 20 tonnes/ha in FY19E.

• In FY19E, IJMP’s FFB output in Indonesia is expected to climb by 8.2%. In Malaysia, FFB production is estimated to fall by more than 10% as FFB yield in 9MFY19 was still affected by the lagged impact of El Nino. Indonesia is expected to account for 55% of IJMP’s FFB production in FY19E.

• The problem of a shortage of barges in Kalimantan has eased. Currently, IJMP is able to sell and transport its CPO to the refineries. In East Kalimantan, IJMP sells its CPO mainly to Sime Darby Plantation. Recall that there was a shortage of barges in Kalimantan in 2H2018 as they were used to transport biodiesel.

Source: AmInvest Research - 3 Apr 2019