- Maintain BUY on IJM Plantations Bhd (IJMP) with an unchanged fair value of RM3.90/share. Our fair value is based on an FY17F PE of 27x.

- We believe that IJMP’s premium valuation is justified due to its minimal exposure to the volatility of downstream activities, healthy balance sheet and young oil palm trees. IJMP’s FYE3/17F PE is 24.5x versus Genting Plantations’ FYE12/16F fully diluted PE of 21.5x and TSH Resources’ FYE12/16F PE of 23.1x.

- IJMP’s PE valuation has also been re-rated due to the expansion in its profitability and planted landbank. IJMP’s planted landbank in Malaysia and Indonesia stood at 58,900ha as at end-March 2015 compared with 25,420ha in 2007. In the past seven years, IJMP’s PE ranged from a low of 6.2x to a high of 48.7x. Average PE was 21.2x.

- There is risk that IJMP’s FFB production growth may fall short of expectations in FY16F due to the dry weather. We understand that the weather has been unfavourable in Sabah and Kalimantan. IJMP’s FFB output expanded by 5.3% YoY in 1QFY16.

- Presently, we are assuming that the group’s FFB production will grow by 7% in FY16F. FFB output in Sabah is expected to be flat while FFB production in Indonesia is estimated to climb by more than 30% on the back of an increase in mature areas of 3,500ha.

- Production cost per tonne in Malaysia is anticipated to range between RM1,400 and RM1,500 in FY16F compared with RM1,400 in FY15. The increase in production cost per tonne is due to inflationary pressures. Unlike other plantation companies, IJMP’s fertiliser cost is expected to be flat in FY16F.

- Production cost per tonne in Indonesia is envisaged to be lower at RM1,600 to RM1,800 in FY16F versus roughly RM2,000 in FY15. We believe that the decline in production cost is due to economies of scale resulting from higher volume of CPO production.

- New plantings are estimated to be a modest 2,000ha in FY16F (FY15: 3,647ha) as IJMP concentrates on bringing crops out from its new mature areas in Indonesia. As IJMP only has 4,000ha to 5,000ha of plantable land left, we reckon that the group will take its time completing plantings on its landbank.

Source: AmeSecurities Research - 31 Jul 2015