- Maintain BUY on IJM Plantations (IJMP) with a lower fair value of RM3.65/share. Our fair value implies a PE of 25x on IJMP’s FY17F EPS.

- IJMP’s 1QFY16 core results (excluding unrealised forex loss of RM10.6mil on USD borrowings) were within our expectations.

- The group’s EBIT shrank by 8.3% YoY to RM39.1mil in 1QFY16 as revenue declined by 20.3% to RM141.7mil. Unlike other plantation companies, the fall in IJMP’s EBIT was not as severe. IJMP’s net profit was also supported by a slide in effective tax rate from 24.5% in 1QFY15 to 14.1% in 1QFY16.

- IJMP’s EBIT margin inched up from 24% in 1QFY15 to 27.6% in 1QFY16. In spite of lower CPO price, core pre-tax profit of the Indonesia unit improved from RM2.8mil in 1QFY15 to RM11.1mil in 1QFY16. The Indonesia division achieved a core pre-tax profit of RM8.2mil in FY15.

- FFB production improved by 5.3% YoY in 1QFY16. We are anticipating a 9% increase in group FFB output in FY16F.

- FFB production in Indonesia surged by 37.1% YoY in 1QFY16 while FFB output in Malaysia slid by 7.8%.

- Indonesia accounted for 38% of IJMP’s FFB output in 1QFY16 (1QFY15: 29.2%). It appears that Indonesia could account for half of group FFB production in a year’s time.

- Average CPO price realised by the Indonesia unit was RM2,002/tonne in 1QFY16 versus RM2,473/tonne in 1QFY15. The average CPO price of RM2,002/tonne in Indonesia was RM165/tonne lower than the average price of RM2,167/tonne recorded in Malaysia in 1QFY16.

- Comparing 1QFY16 against 1QFY15, IJMP’s average CPO price in Malaysia and Indonesia contracted by 15.5% and 17.2% respectively.

- We believe that production cost of IJMP’s plantation division in Indonesia would fall below RM2,000/tonne in FY16F due to higher volume of FFB production. In Malaysia, production cost is estimated to rise to a range of RM1,400/tonne to RM1,500/tonne.

- IJMP’s balance sheet is clean. Net gearing was 24.1% as at end-June 2015. Gross cash was RM337.3mil compared with RM375.4mil as at end-March 2015.

Source: AmeSecurities Research - 26 Aug 2015