Highlights

IJMP expects CPO price in 2013 to average around RM2,500/mt and it feels that CPO price could recover earlier than expected.

IJMP has not done much forward sales so far, due to several reasons, amongst others, management’s anticipation of “earlier-than-expected” CPO price recovery as well as the volatile CPO price currently.

Management highlighted that higher crop production from FY03/14 onwards (on more areas coming into maturity) will bring its Indonesian operations to breakeven during the year, and profitable from FY03/15 onwards. In our forecasts, we are already projecting FFB output in Indonesia to more than double from 22k mt in FY12 to 53k mt, 112k mt and 180k mt in FY03/13, FY03/14 and FY03/15 respectively.

CPO production cost to increase from RM1,380-1400/mt in FY13 to RM1,600/mt in FY14 and this is mainly on the back of the full-year impact from the minimum wage policy implementation and lower PK credit.

Based on our estimates, IJMP will achieve new planting of ~6,000 ha in Indonesia in FY13, bringing total planted area in Indonesia to ~27,000 ha. Management highlighted that the pace of new planting will slow to ~3,000 ha in FY14 (and bringing total planted area in Indonesia to 30,000 ha by then), as the remaining plantable area of ~6,000 ha is considered “difficult area”.

Forecasts

Maintained.

Catalysts (downside)

• Higher-than-expected soybean yield, resulting in lower soybean prices;
• India imposes higher import tax on CPO; and
• Longer-than-expected CPO price recovery path.

Risks

• Earlier-than-expected recovery in the world’s major economies, resulting in higher edible oil demand and prices; and
• Weather uncertainties revisit, resulting in supply distortion, hence boosting edible oil prices including CPO.

Rating

SELL

• Negative – (1) Weak near-term sector outlook; and (2) Unattractive valuation.
• Positives – (1) Strong FFB contribution from Indonesia post FY03/13; and (2) Strong balance sheet.

Valuation

• Maintain TP of RM2.55 based on unchanged 15x CY13 EPS of 17.0 sen. Maintain SELL recommendation on the stock on our cautious sector view and pricey valuations.

Source: Hong Leong Investment Bank Research - 26 Mar 2013