Investment Highlights

• We maintain HOLD on IJM Plantations (IJMP) with an unchanged fair value of RM1.90/share. Our fair value for IJMP is based on an FY22F PE of 18.0x. We ascribe a 3-star ESG rating to IJMP. IJMP is not expected to be reinstated into the Syariah-compliant list any time soon.

• We forecast IJMP’s FFB production to improve by 2.0% in FY22F after an estimated 1.5% rise in FY21F. IJMP’s FFB production growth is not expected to be exciting in FY22F.

• We understand that the group’s FY22F FFB yields would still be affected by the lagged impact of 2019’s drought and haze. In Malaysia, IJMP’s FY22F FFB production is also expected to be impacted by a decline in mature areas of 2,000ha to 2,500ha (FY21E: 1,000ha to 1,250ha) due to replanting.

• We gather that IJMP is currently facing a labour shortage of 5% to 10% in Sabah. The labour shortage may worsen to 10% to 15% during the peak production in 2H2021. The labour shortage pertains mainly to a shortage of workers skilled in harvesting FFB from tall oil palm trees.

• We think that IJMP’s all-in cost of CPO production would increase marginally in FY22F. The group’s all-in costs of CPO production were about RM1,800/tonne in Malaysia and RM2,000/tonne in Indonesia in FY21E.

• The increase in the cost of production per tonne in FY22F is due to higher wages and fertiliser. Cost of wages may go up by more than 3% in FY22F as there was a hike in minimum wage of 3% in South Sumatra. Fertiliser costs are envisaged to increase by 7% to 10% in FY22F.

• The construction of the KLK/IJMP palm refinery in East Kalimantan is ongoing. The palm refinery is expected to be completed at the end of 2023F. The palm refinery is envisaged to command a processing capacity of 1,000 to 2,000 tonnes per day upon completion. The palm refinery is estimated to cost between RM300mil and RM500mil.

• We view the development of the palm refinery positively as IJMP would be able to sell its CPO in East Kalimantan to the palm refinery in the future. IJMP would no longer be in the mercy of other palm refineries that may squeeze the pricing of CPO. Kuala Lumpur Kepong (KLK) has a 75% stake in the palm refinery while IJMP owns another 20%. An Indonesian individual owns the balance 5% of the palm refinery in East Kalimantan.

Source: AmInvest Research - 7 Apr 2021