Investment Highlights

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

• We have reduced IJMP’s FY19F net profit by 28.8% to account for a weaker gross profit margin of 28% vs. 30% previously (FY18: 27.5%). In view of unexciting CPO prices and rising production costs, we believe that IJMP would not be able to achieve a gross profit margin of 30%.

• We consider IJMP’s 4QFY18 results to be below our expectations and consensus estimates. Although core net profit rebounded QoQ in 4QFY18, this was largely driven by positive tax expense and minority interest. IJMP’s EBIT declined by 54.5% from RM41.6mil in 3QFY18 to RM18.9mil in 4QFY18. Pre-tax profit plunged by 64.7% from RM35.9mil in 3QFY18 to RM12.7mil in 4QFY18.

• We attribute the poor results in 4QFY18 to declines in CPO production and price. IJMP’s CPO output fell by 18.9% QoQ in 4QFY18 while average CPO price realised slid by more than 5%.

• Average CPO price in Malaysia eased by 5.3% from RM2,607/tonne in 3QFY18 to RM2,469/tonne in 4QFY18. In Indonesia, average CPO price slid by 11.6% from RM2,405/tonne in 3QFY18 to RM2,126/tonne in 4QFY18. The price difference between Malaysia and Indonesia widened from RM202/tonne in 3QFY18 to RM343/tonne in 4QFY18.

• The Indonesia unit recorded a core pre-tax profit (ex-forex changes) of RM21.2mil in FY18 vs. RM36.5mil in FY17 due to lower CPO price. EBITDA of the Indonesia division was RM90.5mil in FY18 vs. RM95.1mil in FY17. Average CPO price realised in Indonesia fell by 8.1% from RM2,589/tonne in FY17 to RM2,380/tonne in FY18.

• FFB production of the Indonesia unit rose by 16% in FY18. Indonesia accounted for 49.5% of IJMP's FFB production in FY18. On a group basis, IJMP's FFB production expanded by 8.2% in FY18 as higher output from Indonesia compensated for weaker production in Malaysia. IJMP’s FFB output in Malaysia only inched up by 1.5% in FY18.

• Net gearing edged up from 31.4% as at end-December 2017 to 31.8% as at end-March 2018. Capex slid from RM116.4mil in FY17 to RM110.8mil in FY18 as new plantings of oil palm in Indonesia fell. All of IJMP's gross borrowings of RM733.1mil are denominated in USD.

Source: AmInvest Research - 31 May 2018