• Rerating catalysts in the pipeline. Founded in 1970s with a mere 186ha, United Malacca Bhd (UMB) has grown to become a medium sized oil palm plantation company with a total landbank of 49,226 ha, and two 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 aged below 8 years. Meanwhile, UMB is planning to construct another 2 palm oil mills in order to cater for its FFB output in its Millian Labau estate and increase FFB output in Kalimantan, Indonesia. Upon completion, UMB would be able to process all its FFB output, which will further enhance overall profitability.

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

• Downside risks limited. UMB is trading at RM49,520k EV/ha (peers: RM67,592), supported by a strong 16% earnings CAGR for FY16-19. We believe such valuation and sound balance sheet of <0.1x (underpinned by its strong operating cash flow generation) coupled with the formation of two hammer candlesticks (7 & 8 June) would provide sufficient margin of safety to cushion further downside in share prices.

• Ripe for downtrend reversal. Given the hammer candlesticks pattern and upticks in daily slow stochastic and MACD histogram, we expect prices to inch up further in the near term. A decisive breakout above the immediate resistance of RM6.20 (61.8% FR) will likely to lift share prices higher towards RM6.40 (23.6% FR) and our LT objective at RM6.52 (52-week high). On the flip side, key supports are RM6.00 and RM5.89 (200-d SMA). Cut loss at RM5.87.

Source: Hong Leong Investment Bank Research - 19 Jun 2017