Results

1HFY03/14 core net profit of RM43.8m (-28.8%) came in within our expectation, accounting for 49.6% of our fullyear forecast (and 44.4% of consensus full-year forecast).

Deviations

Largely in line

Dividend 

None

Highlights

YTD, although revenue rose 17.6% to RM283.6m (mainly from larger area under maturity in its Indonesian estates), 6MFY03/14 core net profit declined by 28.8% to RM43.8m due to sharply lower realized palm product prices (which declined by 25.5-31.8%), higher plantation maintenance cost (arising from larger newly matured areas) and depreciation charges for the new palm oil mill (which was at startup utilization level) at its Indonesian operations.

Qoq, 2QFY03/14 core net profit more than tripled to RM34.4m (from RM9.4m) on higher CPO sales volume (+9.3%, which in turn was due to larger newly matured area in Indonesia and seasonally higher palm production in Malaysian estates).

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

Maintained. Ceteris paribus, every RM100 change in our CPO price assumption will result in a 10% change in our FY03/15 net profit forecast.

Rating

Under Review

Negatives – Demanding valuation

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

Valuation

Maintain our TP of RM2.48 (based on unchanged 15x FY03/15 EPS of 16.5 sen) for now, pending further review in our CPO price assumption and target P/E. 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 30.5x and 20.3x respectively).

Source: Hong Leong Investment Bank Research - 27 Nov 2013