Investment Highlights

• We are keeping our SELL recommendation on IJM Plantations (IJMP) with a higher fair value of RM1.58/share (vs. RM1.30/share previously). Our fair value of RM1.58/share is based on a PE of 25x on FY21F EPS. This is in line with our PE assumption for TSH Resources.

• We have raised IJMP’s FY21F net profit by 6% to account for a higher average CPO price of RM2,300/tonne vs. RM2,200/tonne previously.

• We consider IJMP’s 1HFY20 net profit to be within consensus estimates and our expectations as CPO prices are expected to improve in the following quarters.

• Comparing 2QFY20 against 1QFY20, IJMP was still in the red in spite of a 29.9% jump in turnover. We believe that IJMP might have incurred higher fertiliser and manuring expenses in 2QFY20. IJMP recorded a smaller core net loss of RM2.3mil in 2QFY20 vs. RM4.9mil in 1QFY20.

• IJMP reported a core net loss of RM7.3mil in 1HFY20 (exforex gain of RM0.2mil) vs. a core net profit of RM5.7mil (ex-forex loss of RM53.5mil) in 1HFY19.

• Included in IJMP’s 1HFY20 net loss was a fair value gain of RM2.4mil on CPO price swaps. Excluding the fair value gain, IJMP’s net loss would have been wider in 1HFY20.

• Like other plantation companies, IJMP was dragged by weak palm product prices and rising production costs. Also, we believe that IJMP incurred higher maintenance and upkeep costs for young mature areas in 1HFY20.

• Average CPO price realised in Malaysia slid by 16.0% to RM1,953/tonne in 1HFY20 from RM2,326/tonne in 1HFY19. Average palm kernel oil price in Malaysia dived to RM2,231/tonne in 1HFY20 from RM3,526/tonne in 1HFY19. In Indonesia, average CPO price realised was RM1,821/tonne in 1HFY20 vs. RM1,998/tonne in 1HFY19.

• EBITDA of the Malaysia plantation division rose by 6.8% to RM28.2mil in 1HFY20 from RM26.4mil in 1HFY19. IJMP’s Indonesia division recorded a lower EBITDA (ex-forex changes) of RM33.1mil in 1HFY20 vs. RM62.0mil in 1HFY19.

• On a positive note, IJMP’s FFB production grew by 10.6% YoY in 1HFY20. Malaysia achieved a 31.0% YoY increase in FFB output in 1HFY20 while Indonesia registered a 1.7% decline. Indonesia accounted for 55.5% of IJMP’s FFB production in 1HFY20 vs. 62.4% in 1HFY19.

Source: AmInvest Research - 27 Nov 2019