• IJMP’s 9M18 PATAMI of RM36.6m came-in below ours and consensus’ expectation. However, adjusted PBT of RM88m was in-line with our forecast PBT.

• Despite an increase in revenue by 8% to RM606m, PBT was lower by 43% mainly due to higher costs incurred and net unrealized foreign exchange loss on USD-denominated borrowing of RM12.87m vs. RM2.1m loss in 9M17.

• On qoq basis, adjusted PBT increased 10.6% to RM32.9m resulting from higher CPO and PKO sales volume in respond of higher FFB and CPO production as well as higher ASP realized of PKO.

• On yoy basis, adjusted PBT was lower by 31% on account of higher costs and, lower ASP of CPO and PKO realized.

• We revised lower our earnings forecast for FY18 and FY19, which resulted in a lower target price of RM2.46 (RM2.95 previously). Maintain Hold.

Higher costs and unrealized forex loss

IJMP’s 9M17 PATAMI of 36.6m was below our expectation. Revenue surged 8% to RM606m on account of higher production and sales volumes in Indonesia operations which has more than offset the impact of lower production and sales volume from Malaysia operations. The lower earnings recorded in 9M18 is as a result of 1) lower ASP realized of CPO and PKO, 2) higher costs from increased replanting activities, minimum wage and harvesting rates revision in the Malaysian operation, 3) higher costs due to the company incurring full plantation maintenance and overheads against a startup yield in Indonesia operations, 5) additional depreciation and overheads associated with the commencement of the second palm oil mill, and 6) higher net unrealized foreign exchange loss of RM12.87m on USD denominated borrowing (9m17: loss of RM2.15m). As a result, PBT margins was lower at 12.4% compared to 23.4% recorded in 9M17.

Earnings qoq improved

On qoq basis, revenue and PBT was higher by 14.5% and 9.8% respectively to RM224.9m and RM10.3m, resulting from higher CPO and PKO sales volume, higher FFB and CPO production from Malaysian operations and higher ASP realized of PKO from both Malaysia and Indonesia operations. The lower net unrealized foreign exchange losses of RM3.6m vs. RM8.5m in 2Q18 on USD-denominated borrowings, and fair value gain on crude palm oil pricing swaps of RM3.1m (as opposed to a loss of RM3.0m in 2Q18), added to the higher profit. On yoy basis, revenue and PBT was higher by 2.1% and 12.2% respectively on account of lower unrealized foreign exchange loss of RM3.5m vs. RM16.9m in 3Q17, which helped mitigate the higher costs from increased replanting activities, interest rate on loans, and full plantation maintenance and overheads costs in Indonesia operations.

Adjusted forecast

Although we expect the group’s FFB production to increase significantly in the future due to a large area of its young estates in Indonesia attaining maturity and high yielding age bracket – the hiccup is higher cost of production and lower ASP of CPO moving forward.

We pared down our earnings forecast for FY18 and FY19 to RM56.8m and RM108.4m respectively from RM86.4m and RM118.0m previously - as we adjusted higher our expected tax rate to 50% for FY18 and 30% for FY19. Hence, our target price (TP) is adjusted to RM2.46 (RM2.95 previously), based on FY19 EPS and PER 20x. Maintain HOLD.

Source: BIMB Securities Research - 28 Feb 2018