Investment Highlights

• We are keeping our SELL recommendation on IJM Plantations (IJMP) with an unchanged fair value of RM1.30/share. Our fair value for IJMP is based on an FY21F PE of 22x. IJMP is currently trading at an FYE3/21F 24.5x compared with TSH Resources’ FYE12/20F PE of 22.7x.

• We have reduced IJMP’s FY20F net profit by 45.1% to account for a lower FFB production growth and gross profit margin. We have also cut IJMP’s FY21F net profit by 18.5% for similar reasons.

• We have assumed that IJMP’s FFB production would improve by 7.5% in FY20F (1QFY20: 4.8% YoY) compared with 4.7% in FY19.

• Underpinning IJMP’s FFB output growth of 7.5% in FY20F is the Indonesia division. The unit is expected to record an FFB production growth of 9% in FY20F (FY19: 15.6%) while in Malaysia, FFB output is envisaged to rise by 5% (FY19: - 6.0%).

• We do not think that IJMP would be facing a shortage of barges in East Kalimantan in 2H2019 unlike 2H2018. Recall that there were not enough barges or vessels to transport CPO to the refineries in East Kalimantan in 2H2018 as they were used to transport biodiesel instead. Indonesia accelerated the implementation of the B20 biodiesel policy in the country in September 2018.

• We believe that this year, there would not be major logistics issues as biodiesel delivery points in Indonesia have been reduced to 10 this year from 112 last year. In addition, we reckon that Indonesian companies have ordered more barges and vessels.

• Due to the rising cost of wages and other inflationary pressures, we reckon that IJMP’s all-in production cost per tonne would increase in FY20F. We think that IJMP’s production cost in Malaysia would climb to RM1,850/tonne in FY20F from RM1,800/tonne in FY19. In Indonesia, production cost is envisaged to be the same at RM2,000/tonne in FY20F.

• Construction of the KL Kepong/IJMP palm refinery in East Kalimantan has not started yet. The parties are waiting for approvals to construct the jetty first. We believe that the approval process will take some time. KL Kepong owns a 75% stake in the palm refinery while IJMP owns another 20%. An Indonesian individual owns the balance 5% of the palm refinery.

Source: AmInvest Research - 2 Aug 2019