Investment Highlights

• Maintain HOLD on IJM Plantations (IJMP) with a lower fair value of RM2.55/share. Our fair value implies an FY19F PE of 20x. We have reduced IJMP's FY19F net profit by 16% to account for a more conservative gross profit margin of 35% vs. 38% previously.

• IJMP's 9MFY18 results fell short of our expectations and consensus estimates due to a high effective tax rate of 72.9% in 3QFY18. IJMP's EBIT improved by 28.2% QoQ to RM41.6mil in 3QFY18 on lower costs in the Malaysia unit. However, group core net profit (ex-forex) declined by 22.4% on the high effective tax rate. We have cut IJMP's FY18F net profit by 13.9% to account for this.

• In the results announcement, IJMP said that the high effective tax rate was due to the de-recognition of deferred tax assets and tax treatment of forex movements.

• Included in IJMP's 9MFY18 net profit was a fair value gain on CPO price swap of RM0.8mil. IJMP recorded a fair value gain on CPO price swap of RM3.1mil in 3QFY18 vs. a loss of RM3.0mil in 2QFY18 and a gain of RM0.7mil in 1QFY18.

• Pre-tax profit of the Malaysian division expanded by 197.3% from RM11.7mil in 2QFY18 to RM34.8mil in 3QFY18 underpinned mainly by lower manuring expenses. The Indonesian unit recorded a core pre-tax profit (ex-forex) of a mere RM1.1mil in 3QFY18 vs. RM15.0mil in 2QFY18 dragged by a 14% drop in FFB production. Comparing 9MFY18 against 9MFY17, the Indonesian division's core pre-tax profit edged down from RM25.1mil to RM24.5mil.

• IJMP's FFB production rose by 6.3% YoY in 9MFY18. In Malaysia, FFB production shrank by 9.4% while the Indonesian unit recorded a 27.3% YoY growth in FFB output in 9MFY18. Indonesia accounted for 40.6% of the group's FFB output in 9MFY18.

• Average realised CPO price in Malaysia was flat at RM2,675/tonne in 9MFY18 compared with RM2,674/tonne in 9MFY17. Palm kernel oil price slipped from RM5,631/tonne in 9MFY17 to RM4,919/tonne in 9MFY18.

• Net gearing inched down from 33.9% as at end-September to 31.4% as at end-December 2017. All of IJMP's gross borrowings of RM777.3mil were denominated in USD.

Source: AmInvest Research - 28 Feb 2018