Investment Highlights

• We maintain HOLD on Chin Teck Plantations (CTP) with an unchanged fair value of RM7.55/share. Our fair value for CTP is now based on a rolled-forward FY24F PE of 10x from FY23E. The PE of 10x is the simple average PE of small cap plantation companies for the past five years. We ascribe a 3-star ESG rating to CTP.

• Going forward, we believe that CTP will be incurring expenses to rehabilitate the 2,023ha Fauzi-Lim Plantation in Gua Musang, Kelantan. Fauzi-Lim’s oil palm trees are more than 20 years old with low FFB yields. The RM45mil acquisition was completed in January 2023.

• CTP’s 1HFY23 net profit was 16% below our forecast. This was due to a lower-than-estimated gross profit margin, share of losses in associates and a 39% increase in administrative expenses. Hence, we reduce CTP’s FY23F net profit by 16% and FY24F net earnings by 8%.

• CTP suffered an erosion in gross profit margin, dragged by higher fertiliser costs. CTP’s gross profit margin slipped to 47.8% in 1HFY23 from 56.1% in 1HFY22.

• CTP’s administrative expenses climbed by 39% YoY to RM17.4mil in 1HFY23 due to the acquisition of Fauzi-Lim Plantation. Share of earnings in associates swung from RM6.8mil in 1HFY22 to a loss of RM0.6mil, dragged by lower CPO prices and disruption in harvesting activities in Indonesia resulting from unrest in neighbouring estates.

• Average realised CPO price slid by 13.8% to RM4,006/tonne in 1HFY23 from RM4,645/tonne in 1HFY22. CTP’s FFB production rose by 32.9% YoY in 1HFY23.

• Comparing 2QFY23 against 1QFY23, CTP’s net profit plunged by 88.5% to RM2.9mil. The QoQ fall in earnings in 2QFY23 can be attributed to lower CPO production and higher production costs.

• Average realised CPO price inched down to RM3,965/tonne in 2QFY23 from RM4,036/tonne in 1QFY23. FFB production contracted by 23.8% QoQ in 2QFY23.

• The group has zero borrowings. Net cash stood at RM356.7mil as at end-February vs. RM412mil as at endNovember 2022.

• CTP is currently trading at a FY24F PE of 11x, which is slightly higher than its 2-year average of 10x.

Source: AmInvest Research - 28 Apr 2023