We believe earnings prospects for IJMP will remain bleak for the next 1-2 years, on the back of: (i) adoption of MFRS 141 (effective Jan-2018), which will result in IJMP’s depreciation charges escalating by >RM30m p.a.; and (ii) rising production cost. Cut FY18-20 core net profit forecasts by 8-24%. Post earnings revision and rolling forward of valuation, we cut our TP to RM2.06 (from RM2.09). We upgrade our recommendation on the stock from Sell to HOLD, as valuations have become more compelling following the recent sell-down.

Below are the key takeaways from our recent meeting with IJMP’s management:

Adoption of MFRS 141 to drag earnings. The adoption of MFRS 141 (effective 1 Jan 2018) will result in IJMP’s depreciation charges skyrocketing, hence dragging earnings. Under the MFRS 141, plantation companies (including IJMP) will capitalise replanting expenses during the course of planting and commence depreciation charges once the planted area graduates to mature bracket. This, in short, means plantation companies with large amount of planted land bank with young age profile (which FFB yields have yet to attain optimal level) will be hit with higher depreciation charges upon adopting MFRS 141, until average FFB yield reaches certain threshold. Management guided that the adoption of MFRS 141 will result in IJMP’s depreciation charges increasing by >RM30m per annum.

Production cost remains on uptrend. Higher depreciation charges aside, management highlighted that cash production cost remains on the uptrend (on blended basis), mainly on the back of higher maintenance cost (arising from wet weather), minimum wage hike, higher fertiliser cost in Indonesia (due mainly to recent Rupiah depreciation) and higher finance cost.

On a slightly more positive note…

FFB production to breach 1m tonnes for the first time in FY19. FFB production rose 7.6% to 853k tonnes in 11MFY18, as higher FFB production in Indonesia (as larger area attained maturity) more than mitigated weak FFB production in Malaysian estates (in particularly, during 1HFY18 on the back of lagged impact from prolonged dry weather). Management shared that overall FFB production will surpass 900k tonnes in FY18 and 1m tonnes in FY19, underpinned by larger area attained maturity in Indonesia, and FFB yield in Malaysian estates normalising since 2HFY18.

Balance sheet to remain healthy. We project net gearing to remain below 0.3x for the next 2 years, due to the absence of significant capex outlay (as both new planting and replanting will likely be insignificant). For FY19, we are projecting a capex of RM120m, of which bulk of it will be incurred for the construction of its 3 rd palm oil mill in Indonesia.

Forecast. We cut our FY18-20 core net profit forecasts by 23.8%, 19.7% and 8.2% respectively, largely to account for higher depreciation charge, finance cost and effective tax rate assumptions.

Upgrade to HOLD, TP: RM2.06. Despite the sharp downward earnings adjustment, we cut our TP on the stock by only 1.4% to RM2.06, as we roll forward our valuation base year (from FY19 to FY20). Our new TP is based on 20x revised FY03/20 revised core EPS of 10.3 sen. We upgrade our recommendation on the stock from sell to HOLD as we feel that valuations have become more compelling following the recent sell-down (share price has plunged by 18.1% YTD). At current share price of RM2.22, IJMP is trading at FY19-20 P/E of 27.9x and 21.5x respectively.

Source: Hong Leong Investment Bank Research - 4 Apr 2018