Results

• 1HFY15 core net profit of RM47.8m (-42.6%) came in within expectations, accounting for only 35.4-36.4% of consensus and our full-year forecasts.

Deviations

• Lower-than-expected FFB production (which accounted for only 43.3% of our full-year forecast); and

• Weaker-than-expected realized CPO selling price (RM2,152/mt vis-à-vis RM2,300/mt we assumed).

Highlights

• YTD… 1H15 core net profit declined by 42.6% to RM47.8m, and the sharp decline was due mainly to: (1) Lower FFB production and realized CPO selling price, which has in turn resulted in operating profit at the palm and bio-integration segment declining by 46.4% to RM68m; (2) Lower exports sales and the absence of deferred investment capital grant, resulting in the wood product manufacturing and trading segment incurring operating loss of RM1m (vs. profit of RM0.4m last year); and (3) Losses at JV.

• QoQ… Although revenue was flat (at RM206.2m), 2Q15 core net profit declined by 41% to RM17.8m mainly on the back of a 4.3% qoq decline in realized CPO selling price, higher finance costs and losses at JV.

Risks

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

Forecasts

• FY15-16 core net profit forecasts lowered by 15.3-17.4%, largely to account for lower FFB yield assumption and lower CPO price achieved YTD. No change in our FY16 average CPO price assumption for now, pending a review (with downward bias) in our sector-wide CPO price assumption. Based on our sensitivity analysis, every RM100/mt decline in CPO price assumption will lower our FY16 earnings forecast 7.5%.

Rating

HOLD

Positives

• - (1) Strong FFB output growth; (2) Stable cash flow from alternative power plant; and (3) Favourable long term outlook of the oil palm business.

Negatives

• High net gearing and relatively stretched valuation.

Valuation

• SOP-derived TP reduced by 17% to RM1.81 (see Figure 5), to reflect the downward revision in our core net profit forecasts as well as the latest market prices of Innoprise and Ekowood. Ceteris paribus, every RM100/mt reduction in our average CPO price assumption will result in a 7.7% (or 14 sen/share) decline in our SOP-derived TP. Maintain HOLD recommendation.

Source: Hong Leong Investment Bank Research - 26 Aug 2015