Investment Highlights

• Although IJM Plantations’ (IJMP) 1QFY19 earnings were unexciting, we are upgrading the group from HOLD to BUY as IJMP is a takeover target. Hence, we have valued IJMP using the RNAV method instead of PE.

• We derive an RNAV of RM3.53/share for IJMP. Applying a 15% discount to the RNAV of RM3.53/share, we arrive at a fair value of RM3.00/share for IJMP. We have used market values of RM80,000/ha to value IJMP’s planted landbank in Sabah and RM45,000/ha for the planted landbank in Indonesia. The fair value of RM3.00/share implies an FY20F PE of 25.2x.

• We are keeping IJMP’s FY19F net profit forecast for now as the increase in FFB production in 2H2018 is expected to boost earnings in the following quarters. IJMP’s core net profit (ex-unrealised forex losses of RM30.9mil) fell by 7.7% YoY to RM11.3mil in 1QFY19 due to the decline in palm product prices and FFB production.

• Included in IJMP’s core net profit in 1QFY19 were fair value losses of RM2.8mil on produce growing on plants i.e. FFB. Under the new accounting standard, plantation companies have to depreciate the oil palm trees but mark to market the value of their FFB every quarter.

• Average CPO price in Malaysia shrank by 13.0% from RM2,753/tonne in 1QFY18 to RM2,395/tonne in 1QFY19. In Indonesia, average CPO price declined by 15.5% from RM2,502/tonne in 1QFY18 to RM2,115/tonne in 1QFY19. The price differential between CPO in Malaysia and Indonesia widened from RM251/tonne in 1QFY18 to RM280/tonne in 1QFY19.

• Group FFB production slid by 8.5% YoY in 1QFY19. The Malaysia division recorded a 22.3% YoY contraction in FFB production in 1QFY19 while in Indonesia, FFB output rose by 3.3%. Indonesia accounted for 60.9% of group FFB production in 1QFY19 vs. 53.9% in 1QFY18.

• Core pre-tax (ex-forex changes) of the Indonesia unit swung from a positive RM8.4mil in 1QFY18 to a loss of RM1.0mil in 1QFY19. This was mainly due to the 15.5% YoY fall in CPO price in 1QFY19. EBITDA of the Indonesia division decreased from RM23.9mil in 1QFY18 to RM4.2mil in 1QFY19.

• IJMP’s depreciation expense increased by 37.6% from RM20.5mil in 1QFY18 (before restatement) to RM28.2mil in 1QFY19 due to the implementation of the MFRS141 accounting standard. We have already accounted for this in our earnings forecast for IJMP.

• Net gearing expanded from 31.8% as at end-March to 40.6% as at end-June 2018. All of IJMP's gross borrowings of RM751.4mil were denominated in USD.

Source: AmInvest Research - 29 Aug 2018