Investment Highlights

• Maintain HOLD on IJM Plantations with an unchanged fair value of RM3.40/share. Our fair value implies a FY18F PE of 22x. We have tweaked IJMP's FY18F net profit downwards by 2.2% for housekeeping reasons.

• IJMP's FY17 results were below our earnings forecast and consensus estimates due to two reasons. First, the group recognised additional deferred tax expense, which resulted in a higher-than-expected effective tax rate. This came about as IJMP derecognised some of the tax losses in its Indonesia unit, which were carried forward previously. As a result, IJMP's effective tax rates were 39.2% in 4QFY17 and 30.8% in FY17 vs. our assumption of 24% for the full year.

• Second, IJMP recognised a fair value loss of RM5.9mil on its plasma receivables in 4QFY17. This was the first time the group had recognised a fair value change in its plasma receivables.

• IJMP's FFB production inched up by 1.7% YoY in FY17. The group's FFB output rose by 8.4% in Indonesia while in Malaysia, FFB production contracted by 3.4%. Indonesia accounted for 46.2% of IJMP's FFB production in FY17.

• Indonesia unit recorded a core pre-tax profit (ex-forex changes) of RM36.5mil in FY17 vs. RM1.1mil in FY16. Indonesia made up 21.9% of IJMP's core pre-tax earnings in FY17.

• Average realised CPO price in Indonesia climbed by 36.3% from RM1,899/tonne in FY16 to RM2,589/tonne in FY17. In Malaysia, average realised CPO price rose by 28.5% from RM2,142/tonne in FY16 to RM2,753/tonne in FY17.

• Average price difference between CPO in Malaysia and Indonesia narrowed from RM243/tonne in FY16 to RM164/tonne in FY17.

• IJMP also benefited from a surge in palm kernel oil prices. PKO price jumped by 77.0% from RM3,294/tonne in Malaysia in FY16 to RM5,830/tonne in FY17.

• Included in IJMP's FY17 net profit was a fair value gain of RM5.0mil on CPO price swaps. The group recorded a fair value gain of RM3.4mil in 4QFY17 compared with a loss of RM1.8mil in 3QFY17.

• Net gearing stood at 29.7% as at end-March 2017 compared with 31.7% as at end-December 2016. All of IJMP's RM924.3mil borrowings were denominated in USD.

Source: AmInvest Research - 26 May 2017