Results

• 9MFY16 core net profit of RM66.1m (-39.6% yoy) came in below expectations, accounting for 52-54% of consensus and our full-year forecasts.

Deviations

• Higher-than-expected effective tax rate

• Lower-than-expected YTD CPO ASP.

Dividend

• -

Highlights

• IJMP recorded 3QFY16 core net loss of RM10.3m (2QFY16: RM46.7m profit; 3QFY15: RM32.3m profit). This was mainly due to the higher effective tax rate during the quarter arising from different tax treatment on forex gain in Indonesia and tax writeback in the previous quarter.

• At operating level, its 3QFY16 pretax profit was up 6% qoq with better performance coming from its Indonesia operation, excluding forex gain of RM35.3m and fair value losses on crude palm oil pricing swaps of RM2.3m. On the other hand, its pretax profit for 9MFY16 was down 42.9% yoy to RM72.6m affected by lower selling price, lower sales volumes as well higher cost of production in Indonesia.

• In 3QFY16, Malaysia operation recorded sharp drop in pretax profit to RM15.7m (-47.5% qoq, -60.5% yoy - excluding fair value losses on crude palm oil pricing swaps) on lower FFB production affected by dry weather. However, its Indonesia operation has turned around from 2QFY16 and recorded profit of RM4.8m supported by higher production and sales volume.

• Expect flattish FFB production for FY16. IJMP recorded 9MFY16 FFB production of 696,719 tonne (flat yoy). It is unlikely to meet our full year expectation of 3-5% growth as 4QFY16 production is likely to be weaker due to production slowdown on seasonal factors and impact from the 1H16 dry weather in Sabah. Thus, we are now expecting flattish production for FY16, down from 3-5% yoy growth previously.

Risks

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

Forecasts

• We revise our FY16-17 net profit forecast downward by 8- 30% to factor in the higher effective tax rate, lower CPO ASP and lower FFB production growth assumption.

Rating

SELL

Positives

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

Negatives

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

Valuation

• Downgrade to SELL with lower Target Price of RM2.80 (previous TP of RM3.05), based on 20x FY17.

Source: Hong Leong Investment Bank Research - 26 Feb 2016