We maintain HOLD on IJMP and expect share price to continue to trade sideways in the near term as there is no strong catalyst to push up the share price. We maintain FFB production growth of 8.9% yoy for FY19 despite the lower yoy growth in 2MFY19 as we anticipate a pick-up in FFB production in 2Q-3QFY19. 1QFY19 earnings are likely to be weaker yoy due to low FFB production and weak CPO prices. Target price: RM2.33. Entry price: RM2.10.

WHAT’S NEW

• No strong catalyst to push up share price. IJM Plantations’ (IJMP) share price slumped 28% to a low of RM2.15 on 11 Jun 18 from the recent high of RM3.00 on 22 Nov 17. Since 11 June, IJMP’s share price has been trending in the range of RM2.15-2.25 as there is no strong catalyst to push up the share price in the near term. Maintain HOLD.

• Share price downside due to earnings. We maintain our earnings expectations for FY19-21 and target price of RM2.33 based on FY20F PE 19x, or -1SD of 5-year mean. If IJMP’s FY19 FFB production misses market expectations or if there is higher-than expected cost of production, this will further drag down the share price due to earnings disappointment. The previous cycle that saw a sharp decline in share price was in 2008, when share price slumped 183% in five months due to earnings weakness (-40% yoy), while forward PE weakened to -1.5SD of the five-year mean. Assuming share price retraces to -1.5SD of the five-year mean of 11x, fair value would be RM1.35/share.

• Expect FFB production to pick up in 2Q-3QFY19. For 2MFY19, IJMP’s FFB production was 163,493 tonnes (-3.0% yoy). Management indicated that FFB production from Malaysia operations will pick up in August and peak in September, while FFB production from Indonesia is likely to register a peak in November. Thus, 1QFY19 earnings are likely to be weaker yoy due to weaker FFB production and CPO prices.

• Maintain FFB production growth of 8.9% yoy for FY19 for now. Malaysia operations are expected to contribute about half a million tonnes in FFB production in FY19, while its Indonesian operations’ FFB production is expected to increase by 50,000-70,000 tonnes (+11% yoy to +15% yoy) to 510,000-530,000 tonnes in FY19. All in all, we expect IJMP’s FFB production to grow 8.9% yoy to 1m tonnes in FY19. Our FFB production growth forecasts for FY19 are in line with management expectations.

STOCK IMPACT

• Cost pressure from rising minimum wage. The plan to synchronise the minimum wages of Sabah and Sarawak (RM920) with that of Peninsular Malaysia (RM1,000) is estimated to increase wages by RM3.5m p.a.. Meanwhile, Pakatan Harapan’s manifesto to raise the minimum wage in its first term in office to RM1,500 is estimated to increase wages by RM25m p.a.. In short, every RM100 increase in minimum wage will increase IJMP’s costs by RM4.0m-4.5m p.a., or 5.0-5.5% of our FY19 net profit forecast. Nevertheless, we understand that the government will subsidise 50% of the minimum wage increase. Note that since the wage increase to RM1,500 is in Pakatan Harapan's first term, and 50% of the increase is subsidised, the implied effective CAGR would not be much higher than the normal annual increase.

• Unit cost of production is expected to stay high in FY19. Total production cost is expected to increase yoy in FY19 amid an expected increase in fertiliser application and higher estate maintenance costs. Fertiliser application could be higher than FY18 on the back of good weather. We understand that the gradual improvement in FFB production is insufficient to offset the increase in costs. Thus, unit cost of production is expected to stay high in FY19 at RM1,600-1,800/tonne.

• Excessive rainfall in Jan-Mar 18. We understand that rainfall in both Sabah and East Kalimantan has been good in 2017. We gather that IJMP’s estates had excessive rainfall in Jan-Mar 18 which affected the harvesting activity, but the impact is not severe. The good rainfall in 2017 is expected to lead to good production in 2018-19. We are expecting FFB production growth of 8.5% for FY20.

• CPO prices in 2018. Management indicated minimal forward selling in FY19 due to the absence of buyers. Current CPO prices of RM2,200-2,300/tonne could have factored in the anticipation of a production pick-up in 2H18. We understand that there is limited downside risk for CPO prices after the significant decline from the peak in Feb 17, but there is no strong catalyst to push CPO prices up amid high palm oil inventory levels. For 2018, management targets CPO price of RM2,400/tonne on average, in line with our estimate of RM2,400/tonne for 2018.

• Higher depreciation expenses due to change in accounting policy. IJMP will report higher depreciation expenses due to a change in accounting policy (MFRS 116). Management is studying the impact of a change in accounting policy. Management indicated that the potential impact could be depreciation expenses increasing by RM30m- 40m per year from the current RM65m-70m. This could reduce our FY19-20 net profit forecasts by 20-25%. However, the adjustment is a non-cash adjustment and mainly caused by a change in accounting policy. We have yet to impute the impact to our FY19- 20 net profit forecasts.

EARNINGS REVISION/RISK

• Maintain FY19-21 earnings estimates. We maintain our FY19-21 net profit forecasts. We are expecting EPS of 9.4 sen, 12.3 sen and 13.0 sen for FY19-21 respectively.

VALUATION/RECOMMENDATION

• Maintain HOLD and target price of RM2.33. Our target price of RM2.33 is based on FY20F PE 19x or -1SD of 5-year mean, in line with sector peers’ valuation (ascribed PE of -1SD of 5-year mean) due to the weak CPO price outlook in 2018. We reckon that current share price has priced in the earnings weakness, but we believe this is not the right time to buy in as we understand that the earnings stability might only come in FY20- 21 when FFB yield reaches 20 tonne/ha. Entry price: RM2.10.

• Downside risk. The previous cycle that saw a sharp decline in share price was in 2008 where share price slumped 183% in five months due to earnings weakness (-40% yoy), while forward PE weakened to -1.5SD of the 5-year mean level. Assuming share price retraces to -1.5SD of the 5-year mean of 11x, fair value would be at RM1.35/share.

SHARE PRICE CATALYST

• Stronger-than-expected FFB production recovery.

Source: UOB Kay Hian Research - 25 Jun 2018