- Maintain BUY on IJM Plantations (IJMP) with a higher fair value of RM3.90/share versus RM3.60/share previously. Our fair value implies a PE of 27x on IJMP’s FY17F EPS. Although IJMP’s results were below expectations, we believe that the group’s earnings would recover faster than its peers in a CPO price up-cycle as it is a pure planter.

- IJMP’s 1HFY16 core results (excluding unrealised forex loss of RM51.7mil on USD borrowings) were below our expectations and consensus estimates due to a loss in the Indonesia division in 2QFY16 and fair value loss of RM5.7mil on CPO price swaps. Incidentally, we understand that more than half of the forex losses have been reversed in October due to the appreciation of the Indonesian Rupiah against the USD.

- Excluding forex, IJMP’s Indonesia division recorded an estimated pre-tax loss of RM10.6mil in 2QFY16 compared to a profit of RM6.3mil in 1QFY16. Comparing 1HFY16 against 1HFY15, the Indonesia unit’s core pre-tax swung from a profit of RM14.3mil to a negative RM4.3mil. We have revised IJMP’s FY16F EPS downwards by 13.8%.

- We estimate the production cost of the Indonesia unit at RM1,800/tonne as the division was in the red at an average CPO price realised of RM1,834/tonne in 2QFY16. However, we reckon that the unit would swing into the black in the coming financial quarters if CPO prices in Indonesia rise above RM1,800/tonne. Production cost per tonne of the Malaysia plantation division was roughly between RM1,400 and RM1,500.

- Pre-tax profit of the Malaysia division held up well at RM24.2mil in 2QFY16 versus RM25.3mil in 1QFY16. EBIT margin of the unit was 23.0% in 2QFY16 against 25.8% in 1QFY16. We believe that profits of the Malaysia unit would have been higher if not for the fair value loss on CPO price swaps.

- IJMP’s FFB production was flat YoY in 1HFY16. After a 5.3% YoY increase in 1QFY16, the group’s FFB output declined by 3.9% YoY in 2QFY16. We believe that the fall in FFB production was due to the drought in Kalimantan and Sabah. IJMP’s FFB production in Malaysia contracted by 9.2% YoY in 1HFY16 while FFB output in Indonesia rose by 24.1%. The group’s FFB production in Indonesia climbed by a softer 12.4% YoY in 2QFY16 after a blistering 37.1% YoY expansion in 1QFY16. Indonesia accounted for 35.7% of IJMP’s FFB output in 1HFY16 compared to 28.9% in 1HFY15.

- Average CPO price realised by the Malaysia plantation unit was RM2,105/tonne in 1HFY16 while the Indonesia division’s average CPO price realised was RM1,922/tonne. Average CPO price realised by the Malaysia unit slid from RM2,167/tonne in 1QFY16 to RM2,050/tonne in 2QFY16.

- IJMP’s balance sheet is healthy. Net gearing was 27.8% as at end- September versus 24.1% as at end-June 2015.

Source: AmeSecurities Research - 25 Nov 2015