- IJM Plantations’ 1QFY14 results were sharply below expectations and consensus estimates as the group sold more of its old CPO inventory, which command lower margins. Out of IJMP’s sales volume of 40,431 tonnes in 1QFY14, about 6,082 tonnes or 15% were inventory from FY13.

- Apart from this, IJMP applied more fertiliser in 1QFY14 due to improved weather. Hence, manuring and upkeep costs were higher by RM6mil YoY in 1QFY14.

- We gather that IJMP’s CPO inventory levels would start normalising only in 3QFY14. Hence, the group would still be drawing down some of its old CPO inventory in 2QFY14.

- Due to the above reasons coupled with weaker CPO price, pre-tax profit of IJMP’s plantation division in Malaysia plunged 71.1% from RM34.0mil in 1QFY13 to RM9.8mil in 1QFY14.

- We have cut IJMP’s FY14F earnings forecast significantly to account for the weak profitability in 1QFY14. We are keeping our FY15F earnings estimate for IJMP for now. We are downgrading IJMP from BUY to HOLD.

- Although IJMP’s pre-tax profit fell, the group’s revenue rose 22.7% YoY to RM134.5mil in 1QFY14 on the back of higher palm oil production.

- IJMP’s FFB production climbed 28.5% YoY in 1QFY14 driven by new mature areas in Indonesia and a recovery in FFB yields in Malaysia. After being affected by the lag impact of the drought last year, IJMP’s FFB output in Malaysia rebounded by 17.6% YoY in 1QFY14F.

- The group’s FFB output in Indonesia expanded by 163.2% from 8,610 tonnes in 1QFY13 to 22,660 tonnes in 1QFY14. IJMP’s FFB production in Indonesia is expected to rise from 55,579 tonnes in FY13 to 100,000 tonnes in FY14F.

- Indonesia accounted for 15% of IJMP’s total FFB production in 1QFY14. Pre-tax loss of the Indonesian plantation unit widened from RM4.8mil in 1QFY13 to RM6.9mil in 1QFY14 partly due to unrealised forex losses in respect of the US$ loans.

- We reckon that IJMP’s palm oil mill in East Kalimantan has not achieved sufficient economies of scale yet. The group would need to source substantial FFB from third parties to run its mill.

- We believe that the mill is operating at an utilisation rate of less than 50% currently. To recap, IJMP’s palm oil mill in East Kalimantan has a capacity of 60 tonnes per hour.

Source: AmeSecurities