Results

1Q12 net profit of RM19.9m (QoQ: -34.9%; YoY: +32.4%) accounted for 22.8% and 20.1% of our and consensus fullyear estimates. We consider the results within our expectation as results are seasonally stronger in 4Q on the back of seasonally stronger FFB output.

Highlights

QoQ. Although revenue rose by 29.2% to RM280.1m (mainly on higher CPO sales), 1Q13 net profit declined by 34.9% mainly on the back of: (1) Seasonally lower FFB production (which declined by 8.4%); (2) Lower average selling price (RM2,149/mt vs. RM2,844/mt); and (3) Lower JV earnings.

YoY. Despite a much lower average CPO price achieved (RM2,149/mt vs. RM2,957/mt a year ago), 1Q13 net profit rose by 32.4% to RM19.9m mainly on the back of: (1) A 43.5% increase in FFB production (which was in turn driven by an increase in harvesting area in Indonesia and the absence of tree stress that resulted in a much lower FFB output in its Sabah estate last year); (2) Lower finance costs; and (3) Higher JV earnings.

Risks

• Earlier-than-expected recovery in the world’s major economies, resulting in better edible oil demand and prices; and
• Weather uncertainties revisit, which would in turn result in edible oil supply distortion, hence boosting edible oil prices.

Forecasts

• Maintained.

Rating

SELL

• Negatives - (1) High net gearing ratio; and (2) Weak nearterm earnings outlook on low CPO price.
• Positives - (1) Strong FFB growth; (2) Stable cash flow from alternative power plant; and (3) Favourable long term outlook of the oil palm business.

Valuation

• SOP-derived TP raised from RM1.85 to RM1.86 as we update the market prices of its subsidiary and associate. Maintain SELL recommendation on the stock.

Source: Hong Leong Investment Bank Research - 21 May 2013