Investment Highlights

• We are downgrading IJM Plantations (IJMP) from BUY to HOLD with a lower fair value of RM3.05/share (vs. RM3.40/share previously). We have reduced IJMP's FY19F net profit by 10% to account for an increase of more than 20% in depreciation expense resulting from the implementation of the FRS116 accounting standard. Under the accounting standard, replanting or new planting expenses are capitalised and then depreciated when the areas become mature.

• We have also lowered IJMP's FY18F net profit by 6.5% after factoring in a weaker FFB production growth. We have assumed that IJMP's FFB would improve by 10% in FY18F vs. 14% previously.

• Based on the new earnings forecast, IJMP is currently trading at a FYE3/19F PE of 19.1x compared with TSH Resources' FYE12/18F PE of 17.7x and Genting Plantations' (GenP) FYE12/18F basic PE of 23.1x.

• We understand that IJMP's FFB production in 2H2017 may not be exciting. FFB output may be flattish MoM in 2H2017, which implies that the peak in production may not be large.

• We gather that the highest level of palm production may only take place either in November or December 2017 as opposed to September or October normally. In Indonesia, peak palm production may only take place one month later after Malaysia's palm production has reached its highest level.

• The weaker-than-expected FFB production in 2H2017 is due to the last leg impact of El Nino. At the same time, the weather is wet at IJMP's oil palm estates in Sumatra, Kalimantan and Sandakan currently. It has been raining consistently with occasional flash floods.

• Looking ahead to 2018F, we gather that industry FFB output would still increase. However, the degree of the expansion is uncertain. In our earnings forecast, we have assumed that IJMP's FFB production would rise by a stronger 12% in FY19F vs. 10% in FY18F.

• Production cost (all-in) in Malaysia is estimated to be RM1,600/tonne in FY18F vs. RM1,480/tonne in FY17 due to higher manuring and recruitment expenses. IJMP is expected to apply more fertiliser in FY18F as there are larger planted areas in Indonesia. In Indonesia, production cost (all-in) is estimated to be RM1,900/tonne in FY18F.

Source: AmInvest Research - 2 Oct 2017