- Maintain HOLD on IJM Plantations (IJMP) with an unchanged fair value of RM3.60/share. Our fair value implies a PE of 18.5x on fully-diluted FY16F EPS.

-  We have brought down IJMP’s FY15F EPS by 12.3% to account for lower operating margin.

-  In its results announcement, IJMP alluded to production cost pressures attributable to the increase in new mature areas in Indonesia. The latter had resulted in higher fixed plantation maintenance and overhead costs.

-  IJMP’s EBIT climbed by 334.7% YoY to RM46.7mil in 1QFY15 on the back of higher CPO price and production.

-  Also, the group did not suffer from sales of low margin CPO inventory, as experienced in the previous year. As a result, IJMP’s EBIT margin improved from 8.0% in 1QFY14 to 26.2% in 1QFY15.

-  IJMP’s plantation unit in Malaysia recorded a pre-tax profit of RM38.2mil in 1QFY15 versus RM9.8mil in 1QFY14 while the Indonesia plantation division achieved a loss of RM7.0mil (inclusive of forex loss of RM17.7mil).

-  Group FFB production expanded 46.1% YoY in 1QFY15. Out of the 216,291 tonnes of FFB output recorded in 1QFY15, Indonesia accounted for 29.2% (1QFY14: 15.3%).

-  IJMP’s FFB production in Indonesia grew 178.7% from 22,660 tonnes in 1QFY14 to 63,154 tonnes in 1QFY15 underpinned mainly by an increase in mature areas. We forecast new mature areas at 6,000ha in FY15F.

-  IJMP realised an average CPO price of RM2,566/tonne in Sabah in 1QFY15 versus RM2,234/tonne in 1QFY14. IJMP’s average CPO price realised of RM2,566/tonne was close to MPOB’s average spot price of RM2,563/tonne for the state.

-  In Indonesia, the group’s average CPO price realised was RM2,473/tonne in 1QFY15. This translates into a price difference of RM93/tonne between Malaysia and Indonesia for IJMP (1QFY14: RM215/tonne).

-  On a QoQ basis, average CPO price realised in Indonesia rose from RM2,313/tonne in 4QFY14 to RM2,473/tonne in 1QFY15.

-  As mentioned in previous reports, we expect IJMP’s cash reserves to increase by RM209mil due to the conversion of the 77.1mil warrants, which will expire on 7 November 2014. The warrants are currently in-the-money as the exercise price of RM2.62/share is below IJMP’s share price.

Source: AmeSecurities