- We maintain BUY on Jaya Tiasa with an upward revised fair value of RM3.16/share (vs. RM2.85/share previously). The fair value is based on a higher PE of 20x (vs. 18x previously) on FY15F EPS of 15.8 sen.

- The valuation is one notch above its 5-year average forward PE of 19x and is on par with the simple average PE of 20x for FY14F for Malaysian plantation stocks.

- Notwithstanding its latest quarterly result, which was below expectations mainly due to seasonal factors, we believe that the further rerating is justified based on the following investment thesis:-

- 1) The strong growth of its FFB output - at 30% to 866,000 tonnes in FY14F, by 20% to breach 1mil tonnes in FY15F, and by another 10% in FY16F.

2) The prime mature areas will rise from just 12% of total planted areas in FY13 to >50% by FY16F (now at ~20%), which will significantly improve FFB production yield as well as OER.

3) The latest evidence of a strong rebound in the timber division, which should provide support during this transition period for the oil palm division.

4) The addition of 2 CPO mills that will slash transportation cost by 40%, if not more. Transportation now accounts for between RM45-RM50/tonne. (Also refer to our earlier report on 24 January 2014: Re-rating on prime mature area growth)

- We reiterate our conviction that the stock has more legs on the upside within the next 12-month horizon premised on the strong growth potential of its oil palm division that is waiting to be unleashed within the next 2 years, while downside risks are limited.

- Jaya Tiasa yesterday announced a 9MFY14 core net profit of RM54mil (+210% YoY) – well below expectations, representing only 43%-48% of our and consensus forecasts. No dividend was declared.

- The shortfall was partly due to a lower CPO average price achieved at ~RM2,217/tonne (-9.5% YoY) – 10% below our assumption of RM2,450/tonne for the full year, and a 29% QoQ seasonal decline in FFB production in 3QFY14.

- OER at 15% has yet to improve, contributing to the sub-par performance of the division. As such, CPO production volume at 52,249 tonnes makes up only 55% of our estimate despite FFB output coming in within touch of our projection at ~69%.

- We understand that the group is making aggressive efforts to improve FFB yield and the OER, which is partly affected by the young maturities of the trees. 

Source: AmeSecurities