Results

9M12 core net profit of RM87.3m (+51.3%) beat expectations, accounted for 96-98.8% of consensus and our full-year forecasts.

Deviations

Lower-than-expected production cost at the plantation division; and

Better-than-expected performance at the wood product manufacturing division.

Dividends

None

Highlights

YTD. Despite a double-digit decline in realized average CPO price, 9M13 core net profit grew 51.3% to RM86.2m mainly due to: (1) Higher FFB production (+33.7%), which has in turn resulted in lower production costs (per tonne) at the plantation division; (2) Lower operating costs at the wood product division; (3) Improved JV contributions; (4) Lower finance cost; and (5) Reinvestment allowances that resulted in lower tax expense.

QoQ. Core net profit almost doubled to RM42.8m (from RM21.6m in the previous quarter) mainly on the back of: (1) Higher FFB output and realized average CPO price; (2) Lower finance cost; and (3) Tax writeback of RM6.9m (arising from reinvestment allowances).

Risks

• Weaker-than-expected FFB production and OER;
• A sharp increase in production cost; and
• A sharp decline in vegetable oil prices.

Forecasts

2013-14 net profit forecasts raised by 26.8-39.5% to RM121.1m, RM147.7m, and RM156.9m respectively, largely to account for lower production cost assumptions.

Rating

HOLD

Positives - (1) Strong FFB growth; (2) Stable cash flow from alternative power plant; (3) Improving net gearing ratio (post Pontian stake sale and private placement); and (4) Favourable long term outlook of the oil palm business.

Negatives – Unattractive valuations

Valuation

SOP-derived TP raised by 38.7% to RM2.58 (15x 2014 plantation earnings, market value of associate and subsidiary, and DCF of biomass) after taking into account higher net profit forecasts and latest market prices of listed subsidiary and associate (Ekowood and Innoprise, respectively). Upgraded from Sell to Hold.

Source:Hong Leong Investment Bank Research - 20 Nov 2013