Highlights

We expect Indonesia to remain the main driver for IJMP’s overall FFB output growth, underpinned by additional planted areas reaching maturity (5,000-8,000 ha p.a. over the next 3 years). In our forecasts, we project IJMP’s overall FFB production to grow by 10-13% in FY03/15-17 (vs. 9.3-10% previously), underpinned by a 26-43% increase in FFB production in Indonesia over the next 3 years.

Management expects CPO production cost in Malaysia to inch up slightly higher to RM1,500/tonne (from RM1,460/tonne in FY03/14), mainly on slightly higher labour and fertilizer costs. We expect IJMP’s higher fertilizer cost to kick in from 2H onwards, as the company has already locked in its fertilizer requirement for the 1H.

Management guided total capex of RM220-270m in FY03/15, of which 90% would be spent on new planting development works in Indonesia. As for its new planting target, management indicated that it is targeting to plant 4,000 ha in FY03/15 (higher than ~2,500 ha planted in FY03/14).

Earnings Forecasts

We are raising our FY03/15-16 net profit forecasts by 5.3% and 12% respectively, largely to account for higher FFB yield and lower production cost assumptions for its Indonesian operations. Based on our sensitivity analysis, every RM100/tonne increase in our average CPO price assumption will raise our FY03/15-17 net profit forecasts by 8.3-8.6%.

Catalysts

• Higher-than-expected FFB output growth; and
• CPO prices strengthen further.

Risks

• Weaker-than-expected FFB output;
• Escalating CPO production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Rating

HOLD

Positives – (1) Rising FFB contribution from estates in Indonesia; and (2) Healthy balance sheet.

Negatives – Unattractive valuations.

Valuation

Following the upward adjustment to our net profit forecasts, we raise our TP on the stock by 12.1% (from RM3.40) to RM3.81 based on unchanged 17x revised FY03/16 EPS of 22.4 sen. Although we like the company for its strong balance sheet and young age profile (which in turn translates to decent FFB production growth prospects), we believe IJMP’s strong near-term earnings growth prospects have already been priced in. Hence, we are maintaining our HOLD recommendation on the stock

Source:Hong Leong Investment Bank Research- 17 Jun 2014