Highlights

• United Malacca Bhd (UMB) started as a small rubber growing company with a mere 186 ha, UMB has grown to become a medium sized oil palm plantation company with a total landbank of 49,226 ha, and 2 palm oil mills in Malaysia with total capacity of 80t/hour.

• We project UMB’s FFB output to grow remarkably (by 14.5- 15.5% in FY18-19), underpinned by its young age profile, with 46% of its total planted landbank is aged below 8 years.

• UMB is planning to construct another 2 palm oil mills in order to cater for its FFB output in its Millian-Labau estate (with total titled area of 10,126 ha) and increasing FFB output in Kalimantan, Indonesia. Upon completion, UMB would be able to process all its FFB output, which will further enhance UMB’s overall profitability.

• We expect UMB’s balance sheet to remain healthy (with net gearing of below 0.1x, based on our projection), underpinned by its strong operating cash flow generation.

• Among its mid-size peers, UMB is the lowest in terms of EV/planted hectare and forward P/B. We believe such valuation does not reflect the potential of United Malacca, and is due for a re-rating given strong FFB output growth prospects in the next few years.

• UMB is planning to venture into large-scale commercial crops, such as coconut, cocoa, coffee and stevia. Such move (one materialises), will cushion the price volatility of palm oil, hence improving the stability of UMB’s earnings over the longer run.

Risks

• (1) Slower-than-expected FFB output recovery; (2) Higher than-expected production cost (in particularly, fertiliser costs); and (3) sharper-than-expected fall in palm product prices.

Forecasts

• We project UMB’s FY18-19 core net profit to increase further by 0.8-26.4% to RM63.3m and RM80m respectively, as we expect higher FFB output (arising from the absence of weather anomalies, i.e. lagged impact of El Nino, and higher yield trend from young palms in Sabah and Kalimantan) to more than mitigate our lower average CPO selling price assumption of RM2,500/mt (vs. our projected average CPO price of RM2,800/mt).

Rating

Initiate with BUY recommendation, TP: RM7.11

• We like UMB for its: (1) Strong FFB output growth prospects; (2) Healthy balance sheet; and (3) Decent valuations among peers

Valuation

• We initiate coverage on UMB with a BUY recommendation and TP of RM7.11 (upside of 13.8%) based on 20x CY2018 core EPS of 35.6 sen.

Source: Hong Leong Investment Bank Research - 25 May 2017