• IJMP’s 1H18 net earnings of RM26.3m was below our and consensus’ expectations.

• Despite an increase in revenue by 11.8% to RM381m, adjusted PBT was lower by 35% to RM54.6m mainly due to higher costs incurred and net unrealized foreign exchange loss on USD-denominated borrowing of RM9.3m.

• On qoq basis, adjusted PBT dropped 19.8% resulting from lower production, lower ASP of CPO and losses on unrealized forex exchange in USD denominated borrowings.

• On yoy basis, revenue and adjusted PBT was lower by 2.5% and 49% respectively to RM196m and RM29.7m on account of lower CPO sales volume, higher costs and lower ASP of PKO realized.

• We revised lower our earnings forecast for FY18 and FY19, which resulted in a lower target price of RM2.95 (RM3.06 previously). Maintain Hold.

Higher costs and unrealized forex loss

In spite of higher FFB production and sales volume of CPO and PKO, both Malaysia and Indonesia operations in 1H18 recorded a lower earnings yoy mainly due to 1) lower ASP of PKO; 2) net unrealized foreign exchange losses of RM9.32m as opposed to gain of RM14.75m in 1H17 on its USD-denominated borrowings; 3) fair value loss on crude palm oil pricing swaps of RM2.3m as oppose a gains of RM3.4m in 1H17; 4) higher costs from replanting activities, minimum wages and harvesting rates revision in Malaysian operations; and 5) higher costs due to incurring full plantation maintenance and overheads against a startup yield in Indonesia operations.

Earnings qoq impacted by forex loss and CPO pricing swaps

On qoq basis, despite revenue higher by 6.4% to RM196.4m, core PBT was lower by 20% as both Malaysia and Indonesia recorded lower earnings by 32% and 13% respectively to RM11.7m and RM6.5m. The lower earnings resulted from net unrealized foreign exchange losses of RM8.5m vs. RM0.84m in 1Q18 on USD-denominated borrowings, and fair value loss on crude palm oil pricing swaps of RM3.0m as oppose to a gain of RM0.72m in 1Q18.

On yoy basis, revenue and adjusted PBT was lower by 2.5% and 49% respectively to RM196m and RM29.7m on account of lower CPO sales volume, higher costs and lower ASP of PKO realized. Net unrealized foreign exchange loss of RM8.5m on USD denominated borrowings (2Q17: gain RM9.4m) also aided to the losses.

Adjusted forecast

We pared down our earnings forecast for FY18 and FY19 to RM86.4m and RM118.0m respectively as we adjusted higher our costs on planting and operational. Hence, our target price (TP) is adjusted to RM2.95 (RM3.06 previously), as we rolled forward our valuation to FY19 EPS. Valuation is based on PER 22x i.e. IJMP’s 3-year average PER. Maintain HOLD.

Source: BIMB Securities Research - 29 Nov 2017