Results

1QFY03/14 core net profit of RM9.4m (yoy: -67.6%; qoq: - 60.7%) came in below expectations, accounting for only 8.5% and 7.7% of our and consensus full-year estimates respectively.

Deviations

• Higher-than-expected production costs; and
• Lower-than-expected realized average selling prices.

Highlights

YoY. Although revenue rose by 22.7% to RM134.5m (lower selling prices were more than mitigated by higher sales volume), 1QFY03/14 core net profit declined by 67.6% to RM9.4m, and this was due mainly to: (1) Margin erosion arising from sharply lower selling prices and higher upkeep cost at Malaysian operations; and (2) Higher plantation maintenance cost (arising from larger newly matured areas) and higher depreciation charges for the new palm oil mill (which was at startup utilization level) at its Indonesian operations.

QoQ. 1QFY03/14 core net profit declined by 60.7% mainly due to seasonally lower production volume and higher upkeep cost at its Malaysian operations, coupled with higher depreciation charges for the new palm oil mill and higher maintenance cost, which in turn widened losses at the Indonesian operations.

Risks

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

Forecasts

FY03/14-15 net profit forecasts cut by 2-16%, largely to account for: (1) Lower CPO selling price assumption (after factoring in the realized selling price in 1Q); and (2) Slightly higher production cost assumptions. Despite the cut in earnings forecasts, we believe earnings will still come in stronger for the remaining quarters of FY14, underpinned by: (1) Seasonally higher output 2Q and 3Q; and (2) The new mill in Indonesia, which will at least narrow losses in its Indonesian operations as and when utilization goes up.

Rating

SELL

Negatives – (1) Weak global economic outlook and impending excess supply of CPO will affect both demand and prices of CPO; and (2) Demanding valuation.

Positives – (1) Strong FFB contribution from Indonesia post FY13; and (2) Strong balance sheet.

Valuation

Despite the earnings forecasts reduction, we raised our TP slightly higher (by 2.1%) to RM2.48 as we rolled forward our valuation base year from CY2014 to FY03/15. Our TP is based on 15x FY03/14 revised core EPS of 16.5 sen. While we like the stock for its strong FFB growth and relatively clean balance sheet, we believe share price upside will be capped by its rich valuation (at FY14-15 P/E of 24.6x and 17.7x respectively) as well as the subdued CPO price outlook.

Source: Hong Leong Investment Bank Research - 28 Aug 2013