Investment Highlights

• We initiate coverage on Chin Teck Plantations (CTP) witha HOLD recommendation and fair value of RM9.80/share. Our fair value for CTP is based on FY23F PE of 13x.

• The FY23F PE assumption of 13x is the simple average PE of small planters in Malaysia. Over the past 5 years, CTP’s PE band ranged from a low of 9.6x to a high of 18x. Average PE was 13.8x. We ascribe a 3-star ESG rating to CTP.

• Weak CPO prices are anticipated to affect CTP’s earnings in 2H2022. However, CTP’s decent FY23F dividend yield of over 3% is expected to support the group’s share price.

• CTP has an EV (enterprise value) of RM17,403/ha compared with Hap Seng Plantations’ RM47,176/ha and TSH Resources’ RM45,009/ha. We attribute CTP’s lower EV/ha to the small size of the group’s planted areas and ageing age profile.

• CTP has a landbank of 11,327ha in Peninsular Malaysia. The group does not have operations in Sabah. Out of the 11,327ha, about 1,618ha are in Port Dickson, 1,618ha in Gua Musang, Kelantan and 8,091ha in Rompin, Pahang. CTP also has 2 palm oil mills with total processing capacity of 70 tonnes per hour.

• CTP’s exposure to Indonesia is via its shareholding in 2 joint ventures (JV). The 2 JVs have 20,423ha of oil palm estates in total in Lampung and South Sumatra. The joint ventures were in the red in FY21 as harvesting activities were affected by unrest in the surrounding villages.

• CTP’s FFB yields and OERs (oil extraction rate) are in line with the average for Peninsular Malaysia. From FY17 to FY21, CTP’s FFB yields ranged from a low of 18.7 tonnes/ha to a high of 24.8/ha while its OERs were between 18.6% and 19.5%.

• We forecast CTP’s cost of CPO production (gross profit level) to range from RM2,300/tonne to RM2,500/tonne in FY22E vs. RM1,769/tonne in FY21. CTP is expected to be affected by high fertiliser costs and wages in FY22E and FY23F.

• On the back of low capex and robust CPO prices in 1H2022, we anticipate CTP’s free cash flows to grow from 57.7 sen in FY21 to 90.6 sen in FY22E. CTP has high cash reserves and zero borrowings. Gross cash stood at RM356.9mil as of end FY21.

Source: AmInvest Research - 2 Aug 2022