-  Maintain HOLD on IJM Plantations (IJMP) with an unchanged fair value of RM3.15/share. Our fair value is based on a PE of 18x of FY15F basic EPS.

-  We have cut IJMP’s FY14F EPS sharply to account for sales of old CPO inventory, which command lower margins. The inventory is expected to be fully drawn down only by end-2QFY14.

-  Also, looking at Genting Plantation’s experience of taking three years (ex-FY09) to turn its Indonesian unit into the black, we believe that IJMP’s plantation unit in Indonesia would only swing into profitability in FY16F.

-  IJMP’s plantation division in Indonesia is expected to record its second year of loss in FY14F. The unit recorded pre-tax losses of RM11.8mil in FY13 and RM6.9mil in 1QFY14.

-  We reckon that it would take time for the group’s palm oil mill in East Kalimantan to turnaround. Currently, IJMP still has to rely on third parties to provide a substantial supply of FFB to the mill.

-  The mill’s average utilisation rate is estimated to range between 60% and 65% in FY14F based on a ratio of 40/60 between internal and external FFB supplies.

-  IJMP’s FFB production in Indonesia is expected to grow from 55,579 tonnes in FY13 to 100,000 tonnes in FY14F and 150,000 tonnes in FY15F.

-  The jump in FFB output is envisaged to be underpinned by increases in mature areas resulting from high level of new plantings carried out in the past couple of years.

-  On average, the size of IJMP’s new plantings was about 6,796ha per year in the past four years. New plantings ranged from a low of 4,998ha in FY10 to a high of 8,300ha in FY11.

-  However going forward, the pace of new plantings is anticipated to decline as the group moves into terrains that are more difficult and challenging. New plantings are estimated at 3,000ha in FY14F.

-  As IJMP’s landbank in Indonesia is still below the proposed cap of 100,000ha, we believe that the group has room to expand its landbank. IJMP’s landbank in Indonesia amount to 48,071ha, out of which, 57% is already planted.  

Source: AmeSecurities