Results

• FY16 core net profit of RM40.3m (-70.3% yoy) came in below expectations, accounting for 51% and 45% of ours and consensus full-year forecasts.

Deviations

• Higher-than-expected effective tax rate due to derecognition of deferred tax assets and the taxation of unrealized foreign differences in Indonesia.

• Higher than expected cost of production.

Dividend

• Declared single tier interim dividend of 5sen/share.

Highlights

• IJMP recorded 4QFY16 core net loss of RM25.8m (3QFY16: RM10.3m losses; 4QFY15: RM32.5m profit). This was mainly due to the higher effective tax rate during the quarter and lower contribution from Malaysian and Indonesian operation.

• Its full year FY16 results was dragged by 1) high effective tax rate, 2) lower FFB production (-1.7% yoy), 3) high production cost with the increase in young mature areas and 4) lower CPO prices especially in Indonesia due to the implementation of export levy.

• FBB production in 4QFY16 was hit by seasonal factor and prolonged drought in 2015 and early 2016. Its FFB and CPO production was down 35% and 36% qoq (8% and 10% yoy) respectively. Malaysia’s FFB production was down 47.8% qoq (-36.6% yoy) while Indonesia’s FFB production was down 22.0% qoq (+34.6% yoy).

• Better FY17. Despite a weak set of FY16 results, we expect better FY17 performance on the back of improving production growth of 8-10% and better CPO prices. 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.

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 net profit forecast downward by 14% for FY17 to factor in the higher effective tax rate and higher cost of 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. Target price is raised to RM2.90 (previous TP of RM2.80), as we rollover our valuation to FY18, pegged at unchanged 20x PE.

Source: Hong Leong Investment Bank Research - 27 May 2016