Results

• Below expectations. 6MFY18 core net profit of RM34.2m (yoy: -26.1%) came in below expectations, accounting for just 34% and 33% of our and consensus full-year forecasts.

Deviations

• Poorer-than-expected FFB production, higher replanting, wage costs in Malaysian operations and effective tax rate (31.5% vs our expected 26%)

Dividend

• None.

Highlights

• Yoy: 2Q18 core net profit plunged 44.9% to RM20.9m (from RM37.9m in 2QFY17), as the significantly higher FFB production from Indonesian operations was more than offset by lower FFB production, higher cost of increased replanting activities, minimum wage, and harvesting rates revision in the Malaysian operations and the increased mature areas in the Indonesian operations (which incurred full plantation maintenance and overheads against a startup yield).
• Qoq: 2Q18 core net profit rose by 22.6% due to higher PKO sales volume and price in spite of lower FFB production in both Malaysia and Indonesia operations.
• YTD: 1H18 core net profit declined by 26.1% to RM37.9m as a result of dry weather (which has in turn resulted in lower FFB production), higher replanting and wage costs in Malaysian operations. However, all these were partly mitigated by a strong earnings growth registered in Indonesia operations (1H18 PBT: RM25.7m vs. 1H17 PBT: RM6.8m after adjusting for net foreign exchange losses gains and crude palm oil pricing swaps, due to a larger area of oil palms reaching maturity).
• Outlook: We project FFB output to grow by circa 12% to 944,783 tonnes in FY18 (from 862,435 tonnes in FY17) as the young age profile of its planted landbank in Indonesia turns increasingly young mature and yielding more FFB. Given the young age profile, coupled with the absence of weather-induced output disruptions, we expect earnings to rebound in the coming quarters as FFB production ramps up..

Risks

• Weaker-than-expected FFB production.
• A sharp increase in production cost.
• A sharp decline in vegetable oil prices.
• Occurrence of another dry spell.

Forecasts

• We lower our FY18 earnings forecasts by 5.4% to account for higher than expected tax rate and higher cost of production going forward but leave FY19/20 forecasts unchanged.

Rating

SELL (↔)

• With a larger area of IJMP’s young estates in Indonesia attaining maturity, we expect the group’s FFB production to increase significantly going forward. Although we like IJMP for its decent FFB output growth prospects we believe it IJMP is overvalued at current price levels.

Valuation

• We maintain our Sell call with an unchanged TP of RM2.42 (based on unchanged 20x PE of FY19 EPS).

Source: Hong Leong Investment Bank Research - 29 Nov2017