- Maintain HOLD on IJM Plantations (IJMP) with an unchanged fair value of RM3.60/share. Our fair value implies a PE of 20x on IJMP’s fully-diluted FY16F EPS.

- Excluding the RM6.9mil fair value gain on CPO swaps, IJMP’s 1HFY15 results would have been below our earnings forecast. We have reduced IJMP’s FY15F earnings forecast by 17.6% to account for lower CPO price and profit margins in the coming financial quarters. We have assumed an average CPO price of RM2,300/tonne for IJMP in FY15F. IJMP’s financial year-end is 31 March.

- In spite of a weaker CPO price QoQ in 2QFY15, IJMP managed to sustain its EBIT margin. The group’s EBIT margin inched up from 24.0% in 1QFY15 to 25.5% in 2QFY15. Excluding the RM3.0mil fair value gain in 2QFY15, EBIT margin would have been 23.8%.

- Also, IJMP’s turnover shrank by a mere 2.3% QoQ in 2QFY15 as increased sales of CPO partly compensated for the fall in selling price.

- Sales of CPO products in Malaysia expanded by 29.5% QoQ in 2QFY15 compared with a 12.7% decline in the average CPO price. Sales of CPO products were partly underpinned by a drawdown of inventory.

- This coupled with the fair value gain on CPO swaps resulted in the pre-tax profit of the Malaysia plantation unit edging down by a small 1.3% only in 2QFY15. Average CPO price realised in Malaysia shrank 12.7% from RM2,566/tonne in 1QFY15 to RM2,241/tonne in 2QFY15.

- IJMP’s FFB production in Malaysia climbed 18.8% YoY in 1HFY15 due to a recovery in FFB yields. CPO output in Malaysia expanded by a larger 27.2% YoY on the back of a 46% increase in FFB purchases in 1HFY15.

- IJMP’s Indonesia division chalked up a pre-tax profit of RM4.8mil (ex-forex) in 2QFY15 compared with RM2.8mil (ex-forex) in 1QFY15. This was a surprise as the group’s plantation production cost in Indonesia is estimated at a high RM2,400/tonne. We believe that some of the fair value gains may have been apportioned to the Indonesia unit.

- Indonesia accounted for 28.9% of IJMP’s FFB production in 1HFY15. The group’s FFB output in Indonesia surged 158.0% YoY to 133,146 tonnes in 1HFY15.

- The difference between IJMP’s CPO prices in Malaysia and Indonesia was RM230/tonne in 1HFY15 compared with RM212/tonne in 1HFY14.

Source: AmeSecurities