Highlights

• Hit by dry weather. IJMP recorded FFB production of 848,059 tonnes (-1.7% yoy) for FY16, in line with our expectation. Prolonged dryness in Sabah since 1Q15 has affected its Sabah production in FY16. Sabah’s FFB production was down by 19% yoy while Indonesia’s FFB production was up by 34% yoy in FY16. Sabah operation accounts for about 57% of its total production in FY16 (vs 68% in FY15).

• CPO production below expectation. Although IJMP’s FFB production was in line with our expectation, its CPO production of 219,503 tonnes (-8% yoy) was below our expectation due to less third party fruit intake (-18% yoy). This was likely due to rising internal crop and less external crop available affected by the prolonged drought.

• Better production growth in FY17 coming from Indonesia. While its Sabah production is affected by the dry weather, production growth from its Indonesia estate is expected to remain strong going forward due to the young age profile. This would help to offset the weak production in Sabah. For FY17, we expect 10-12% FFB production growth for IJMP mainly attributed to its Indonesia operation.

• Unlikely to benefit from rising CPO price trend. Pure upstream player is highly leveraged on CPO price movement. However, IJMP is likely to benefit the least from this round of CPO price rally as it is dragged by low production growth in FY16 and FY17.

• Seasonally weak 4Q. 4Q is seasonally weakest quarter for IJMP due to low production season. However, besides the seasonal factor, 4QFY16 was also hit by prolonged drought in 2015. Its FFB and CPO production was down 35% and 36% qoq (8% and 10% yoy) respectively despite recovery in CPO prices. Sabah’s CPO ASP increased by 12.4% qoq (+7.1% yoy) in 4QFY16 while Indonesia CPO ASP has been impacted by the implementation of US$50/tonne export levy since last year.

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 earnings forecast downward by 9% to factor in the lower than expected CPO production.

Rating

SELL

Positives

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

Negatives

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

Valuation

• Maintain SELL with target price of RM2.80, based on 20x FY17.

Source: Hong Leong Investment Bank Research - 7 Apr 2016