- Maintain HOLD on IJM Plantations Bhd (IJMP) with an unchanged fair value of RM3.60/share. Our fair value implies an FY16F PE of 27x. We have reduced IJMP’s FY6F EPS by 11.9% to account for lower gross profit margin.

- We forecast IJMP’s FFB production to grow by 18% in FY15F and 14% in FY16F. The group’s FFB output in Sabah is estimated to increase by 4% in FY15F before declining by 5% in FY16F.

- We believe that stress and replanting would affect IJMP’s FFB production in Sabah in FY16F. The group is expected to replant between 800ha and 1,000ha of land in FY16F compared with 500ha to 600ha in FY15F.

- In Indonesia, IJMP’s FFB production is anticipated to climb by 83.7% in FY15F and 50.9% in FY16F. In spite of the dry weather in Kalimantan in October 2014, the group’s FFB output is still expected to grow on the back of an increase in mature areas of 9,000ha.

- Group production cost per tonne is expected to rise in FY16F mainly dragged by the decline in CPO production in Sabah. Production cost per tonne in Sabah is envisaged to increase from RM1,400/tonne in FY15F to RM1,500/tonne in FY16F.

- IJMP has locked-in some fertiliser supply for FY16F. The group is still shopping around for fertiliser. Recall that an industry player said that fertiliser prices are expected to rise 10% to 11% in 1H2015.

- Production costs in Indonesia are expected to decline from RM2,000/tonne in FY15F to RM1,800/tonne in FY16F underpinned mainly by the 50.9% expansion in FFB production.

- We believe that IJMP’s 32%-owned refinery in East Kalimantan would only be completed in 2017F. The group would be able to sell its CPO to the refinery in the future instead of other places.

- The refinery would also be sourcing CPO from Kuala Lumpur Kepong (KLK). KLK owns 63% of the refinery. The KLK/IJMP refinery would be the first in East Kalimantan. Currently, there are 90 palm oil mills in East Kalimantan.

- IJMP has USD borrowings of RM664.3mil as at endSeptember 2014. However, this is not expected to be a major issue as the translation losses are unrealised.

Source: AmeSecurities