Results

• 1HFY03/16 core net profit of RM76.4m (+7.8% yoy) came in above expectations, accounting for 62-63% of consensus and our full-year forecasts, boosted by tax writeback and higher positive minority interest. However, it was below expectation at operating level.

Deviations

• Higher-than-expected cost of production.

• Lower-than-expected YTD CPO ASP.

Dividend

• -

Highlights

• 2QFY03/16 core net profit increased by 56.9% qoq (+50.4% yoy) mainly due to the tax writeback and higher positive minority interest. Excluding the forex losses and fair value loss on CPO pricing swaps, its pretax profit was down by 41.0% qoq (-49.6% yoy) to RM19.3m due to lower selling prices and high cost of production despite higher CPO sales volume.

• Despite higher CPO sales volume, Malaysia operation recorded 4.3% qoq decline in pretax profit (-35.7% yoy) due to fair value losses on crude palm oil pricing swaps. On the other hand, Indonesia operation recorded RM10.6m pretax losses owing to lower selling prices and high cost of production from large young mature area as well as implementation of palm oil export levy of U$50/tonne.

• Expect FFB production of 3-5% for FY03/16. We revise our FFB production growth assumption to 3-5% from 12- 13% previously for FY03/16, in line with management guidance. This is to factor in the potential lagged impact from severe dry weather in Sabah and Kalimantan.

Risks

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

Forecasts

• We revised our FY03/16-17 net profit forecast by +2.5% and -11% respectively to factor in the higher minority interest and tax write-back in FY03/16 as well as lower FFB production growth assumption.

Rating

HOLD

Positives

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

Negatives

• (1) Demanding valuation; and (2) Low liquidity.

Valuation

• Maintain HOLD with lower Target Price of RM3.05 (previous TP of RM3.52), based on 20x FY03/17.

Source: Hong Leong Investment Bank Research - 25 Nov 2015