Investment Highlights

• Maintain HOLD on IJM Plantations (IJMP) with a lower fair value of RM2.40/share, which implies an FY20F PE of 20x.

• We have used FY20F as a basis in arriving at IJMP's fair value as this is a better reflection of IJMP's earnings potential. IJMP's FY19F net profit is expected to be hit by higher effective tax rate and depreciation from the implementation of a new accounting standard.

• We have reduced IJMP's FY19F earnings by 23.6% to account for (1) an increase in depreciation expense, (2) higher effective tax rate of 35% vs. 27% previously and (3) lower CPO price assumption of RM2,450/tonne vs. RM2,650/tonne previously.

• IJMP's effective tax rate is expected to be high in FY19F as previous tax losses in Indonesia have to be reversed and some of the interest expense cannot be deducted for tax. Although we had cut IJMP's FY19F net profit previously to account for the rise in depreciation expense, we believe that our earnings revision at that time was not conservative enough.

• In spite of the downward revision in earnings, we believe that IJMP's net profit would rebound by 47% in FY19F as some of the expenses incurred in FY18F may not re-occur. The group had already adjusted its harvesting rates in Malaysia and repaired its roads and drains in FY18F.

• IJMP's quarterly results in 9MFY18 have been poor mainly due to a high production cost per tonne in Malaysia. The Malaysian unit was hit by a 9.4% YoY drop in FFB production in 9MFY18 while at the same time, average CPO price realised was flat. Apart from these, the Malaysian unit recorded increases in wages and maintenance expenses for roads and drains. As such, IJMP's production cost per tonne (all-in) in Malaysia is expected to increase from RM1,480/tonne in FY17 to RM1,600/tonne in FY18F.

• In Indonesia, we expect IJMP's production cost per tonne (all-in) to be high at RM1,800 in FY18F as FFB yields in the country are still below the optimum level of 20 tonnes/ha.

• IJMP's FFB production is robust. We understand that after a quiet period in March, FFB production is expected to pick up in April. FFB output in 2Q2018 is envisaged to be higher than 1Q2018. FFB production in 2H2018 may be higher than 2H2017.

• We have assumed that IJMP's FFB production would improve by 6.6% in FY18F (FY17: 1.7%). The group's FFB output growth was 7.7% YoY in 11MFY18. We have forecast that IJMP's FFB production would increase by 13.8% in FY19F underpinned mainly by the Indonesia unit. The group's FFB output is expected to exceed one million tonnes for the first time in FY19F.

Source: AmInvest Research - 4 Apr 2018