Investment Highlights

• Maintain HOLD on IJM Plantations (IJMP) with an unchanged fair value of RM3.05/share. Our fair value implies an FY19F PE of 20x.

• IJMP's annualised 1HFY18 results were below our earnings forecast and consensus estimates as the Malaysian operations suffered an increase in replanting expenses and an upward revision in the harvesting rates. As a result, group EBIT margin shrank from 28.1% in 1HFY16 to 16.7% in 1HFY17.

• We understand that IJMP replanted 400ha in 1HFY18 against 200ha in 1HFY17. Also, harvesting rates increased in Sugut in line with the height of the oil palm trees. Harvesting rates for taller oil palm trees are higher than those for short trees as it is more difficult to harvest FFB from a taller tree.

• We have reduced the group's FY18F net profit by 42.4% to account for the erosion in operating profit margin resulting from these expenses.

• Included in IJMP's net profit was a fair value loss on CPO price swap of RM2.3mil in 1HFY17 vs. a gain of RM3.4mil in 1HFY16. IJMP recorded a fair value loss on CPO price swap of RM3.0mil in 2QFY18 compared with a gain of RM0.7mil in 1QFY18.

• IJMP's FFB production climbed by 9.9% YoY in 1HFY18. FFB output fell by 19.0% in Malaysia while in Indonesia, FFB production expanded by 55.9%. Indonesia accounted for 54.8% of IJMP's FFB output in 1HFY18 (1HFY17: 38.7%).

• Average realised CPO price in Malaysia was RM2,718/tonne in 1HFY18 compared with RM2,588/tonne in 1HFY17. Palm kernel oil price slipped from RM5,374/tonne in 1HFY17 to RM4,543/tonne in 1HFY18.

• The Indonesia plantation division recorded a core pre-tax profit (ex-unrealised forex loss of RM9.3mil) of RM23.4mil in 1HFY18 vs. RM10.2mil in 1HFY17 in line with the surge in CPO production. Comparing 2QFY18 against 1QFY18, core pre-tax profit of the Indonesia unit improved from RM8.4mil to RM15.0mil.

• IJMP realised an average CPO price of RM2,470/tonne in Indonesia in 1HFY18 against RM2,411/tonne in 1HFY17. Average price difference between CPO in Malaysia and Indonesia widened from RM177/tonne in 1HFY17 to RM248/tonne in 1HFY18.

• Net gearing edged up from 31.0% as at end-June to 33.9% as at end-September 2017. All of IJMP's gross borrowings of RM853.0mil are denominated in USD.

Source: AmInvest Research - 29 Nov 2017