Investment Highlights

• We are keeping our SELL recommendation on IJM Plantations (IJMP) with an unchanged fair value of RM1.58/share. Our fair value for IJMP is based on an FY21F PE of 25x.

• We believe that IJMP would be reinstated in the list of Syariah-compliant companies during the Securities Commission (SC) review in November 2020. IJMP plans to raise about RM100mil Islamic borrowings to part-finance some of its conventional borrowings. IJMP’s gross borrowings stood at RM876.2mil as at end-September 2019. Net gearing was 52.1%.

• IJMP was excluded from the Syariah list in November 2019 as the ratio of the group’s conventional borrowings over total assets exceeded the threshold level of 33%. Currently, about 69.0% of IJMP’s borrowings are in USD while another 23.3% are in Japanese yen. The balance 7.8% of IJMP’s borrowings are denominated in MYR.

• We have assumed IJMP’s FFB production growth to be 7.2% each for FY20E and FY21F. We believe that Indonesia would drive IJMP’s FFB production growth in FY21F. Indonesia is envisaged to account for 55% to 60% of IJMP’s FFB production in FY21F.

• We think that IJMP’s FFB output in Indonesia would increase by more than 10% in FY21F underpinned by an increase in mature areas of 1,500ha (FY20E: 1,300ha). In Malaysia, FFB production is expected to be flat in FY21F due to replanting of 2,000ha (FY20E: 1,000ha) of ageing oil palm trees in Sabah.

• We believe that IJMP’s all-in production cost would be stagnant at RM2,100/tonne in Indonesia in FY21F. Higher costs of wages and fertiliser are expected to be offset by lower transportation costs in Indonesia. In Malaysia, IJMP’s all-in production costs are estimated to be RM1,900/tonne each in FY20E and FY21F.

• We think that IJMP’s transportation costs in North Kalimantan would decline in FY21F. IJMP would be able to send the FFB from its oil palm estates in North Kalimantan to the group’s own palm oil mill instead of being transported to third-party mills, which are located more than six hours’ drive away. IJMP is in the process of completing the construction of the 60-tonne per hour US$25mil palm oil mill in North Kalimantan.

• We have assumed a capex of RM160mil for IJMP in FY21F vs. RM130mil in FY20E. IJMP’s FY21F capex is expected to be mainly in respect of replanting of ageing oil palm trees in Malaysia. IJMP does not have significant plantable land left in Indonesia.

Source: AmInvest Research - 10 Feb 2020