Results

• 2Q16 core net profit of RM35.9m (qoq: +0.6%; yoy: -20.8%) took 1HFY16 core net profit to RM71.6m (-37.1%). The results came in below expectations, accounting for only 27% and 25% of our and consensus full-year forecasts.

Deviations

• Lower-than-expected FFB production (from estates in Indonesia) and higher-than-expected finance cost.

Dividend

Declared interim DPS of 2 sen.

Highlights

• QoQ… Although palm product prices were higher by 14- 26% (see Figure 4), 2Q16 core net profit rose by only 0.6% to RM35.9m, as higher palm product prices were mostly offset by lower FFB output in Indonesia, higher manuring cost and tax expense. Overall FFB output rose by 4.4% to 329k mt, as lower output in Indonesia was more than offset by an output recovery in Malaysia (in particularly the Sabah estates).

• YTD… 1H16 core net profit declined by 37.1% to RM71.6m due mainly to lower plantation earnings (which was in turn affected by lower FFB output and higher manuring cost), lower property earnings (due to the absence of sizeable land sale) and higher finance costs.

• FY16 FFB growth guidance lowered further to 5-6% (from 6-7% previously), after taking into account of the production shortfall registered in 1H16.

• Blended CPO production cost eased slightly to RM1,700/mt in 1H16 (from RM1,730/mt in 1Q16). While lower FFB yield will have an impact on its production cost, management expects production cost to inch up by less than RM100 to circa RM1,500/mt, as lower FFB yield and minimum wage hike (effective from Jul-16) will be partly mitigated by lower fertilizer and fuel cost, and higher PK credit (arising from higher PK prices).

Risks

• Weaker-than-expected FFB production and OER

• Escalating CPO production cost.

• A sharp decline in vegetable oil prices.

Forecasts

• We cut our FY16-17 earnings forecasts by 22.6% and 10.2%, to reflect lower FFB yield and higher interest expense assumptions.

Rating

HOLD

• Positives – (1) Increasing contribution from oil palm in Indonesia; (2) Strong balance sheet; and (3) Potentially, upside surprises to earnings from JPO.

• Negatives – (1) Less upbeat overall demand outlook for property sector; and (2) low liquidity.

Valuation

Post earnings adjustments, we cut our SOP-derived TP on the stock by 3.4% to RM10.72 (see Figure 5). Maintain HOLD recommendation on the stock.

Source: Hong Leong Investment Bank Research - 26 Aug 2016