Results

2013 core net profit of RM314.5m (-3.8%) beats expectations, exceeding our and consensus forecasts by 9.9% and 16.4% respectively.

Deviations

Better-than-expected property sales.

Highlights

YTD. Although revenue increasing by 12.2% to RM1.38bn (mainly on higher contribution from Indonesian plantation operations and property development division), FY13 core net profit declined by 3.8% to RM314.5m mainly on the back of weaker palm product prices and slightly higher CPO unit production cost, partially offset by higher FFB production and property earnings.

QoQ. 4Q13 core net profit jumped 84.6% to RM121.8m, mainly on the back of: (1) Better palm product prices; (2) Seasonally higher FFB output in Malaysia; (3) Higher FFB output in Indonesia (which in turn was due to the absence of festive holidays and more areas reaching maturity); and (4) The sale of higher margin products (in particularly, commercial and industrial offerings) by the property development division.

Conference call highlights. (1) 2014 overall FFB output growth guidance lowered to ~10% on the recent dry season in Malaysia; (2) 2014 production cost to decline on lower fertilizer cost and higher output; (3) New planting guidance in 2014; (4) Biodiesel unit is well positioned for B5 implementation in Sabah; and (5) Property will continue to do well in 2014, although profitability will be weaker.

Risks

• Economic uncertainties in world’s major economies that may hurt demand and prices of edible oil (including palm oil); and
• Escalating CPO production cost.

Forecasts

FY14-15 net profit forecasts raised by 1.6-2%, largely to account for slightly lower production cost assumption. Our sensitivity analysis indicates that every RM100/tonne change in our CPO price assumption will result in 8.1% and 5% changes in our FY14 net profit forecast and TP respectively.

Rating

BUY

Positives – (1) Increasing contribution from oil palm in Indonesia; (2) Strong balance sheet; and (3) Potentially, upside surprises to earnings from JPO.

Negatives – (1) Less upbeat overall demand outlook for property sector; and (2) low liquidity.

Valuation

Despite our slightly higher net profit forecasts, we lowered our SOP-derived TP on the stock by 0.7% to RM12.12 as we updated its latest net debt position. Maintain BUY recommendation.

Source: Hong Leong Investment Bank Research - 27 Feb 2014