United Malacca registered a core net loss of RM12.5m in 1QFY19. While 1Q performance is seasonally weaker, the results still missed expectations (vs. consensus and our full-year net profit forecasts of RM49.9-54.7m) mainly on the back of lower-than-expected realised palm product prices and FFB production (for both Malaysian and Indonesian region) and higher-than-expected depreciation charges arising from adoption of MFRS framework. We cut our FY19-20 core net profit forecasts by 21.5-61.1% to RM21.3m and RM79.9m respectively, to account for higher depreciation charges (arising from adoption of MFRS framework) and lower palm product prices realised in 1QFY19. TP cut by 11.4% to RM5.65 as we switched valuation methodology to sum-of-parts (based on EV/planted area) from P/E previously as we believe P/E valuation could no longer reflect the true value of the company following the recent adoption of MFRS 141 and 16. Maintain HOLD rating.

1QFY19 results disappointed. United Malacca registered a core net loss of RM12.5m in 1QFY19 (vs. core net profit of RM7.9m in 4QFY18 and RM5.7m in 1QFY18). While 1Q performance is seasonally weaker, the results still missed expectations (vs. consensus and our full-year net profit forecasts of RM49.9-54.7m) mainly on the back of lower-than-expected realised palm product prices and FFB production (for both Malaysian and Indonesian region) and higher-than-expected depreciation charges arising from adoption of MFRS framework.

QoQ. 1QFY19 performance deteriorated to a core net loss of RM12.5m (from a core net profit of RM7.9m in 4QFY18) mainly on the back of (i) a 30% decline in overall FFB production (as FFB yield in both Malaysian and Indonesian operations was affected by extended wet weather condition), (ii) impact arising from adoption of MFRS framework (which has in turn resulted in much higher depreciation charges), and (iii) lower palm product prices.

YoY. 1QFY19 performance swung to a core net loss of RM12.5m (from a core net profit of RM5.7m in 1QFY18) mainly on the back of a 24% decline in overall FFB production, impact arising from adoption of MFRS framework, as well as lower palm product prices.

Forecast. We cut our FY19-20 core net profit forecasts by 21.5-61.1% to RM21.3m and RM79.9m respectively, largely to account for higher depreciation charges (arising from adoption of MFRS framework) and lower palm product prices realised in 1QFY19.

Maintain HOLD; TP: RM5.65. We took this opportunity to switch our valuation methodology on United Malacca to sum-of-parts (based on EV/planted area) from P/E previously as we believe P/E valuation could no longer reflect the true value of the company following the recent adoption of MFRS 141 and 16 (which, in our view have distorted plantation companies’ performance, including United Malacca). Correspondingly, our TP on the stock has been revised downward by 11.4% to RM5.65 (see Figure 2). Maintain HOLD recommendation. While we still like UMB for its young age profile, strong balance sheet (with net gearing of 0.03x as at 31 Jul 18), we believe near-term upside is capped by current weak CPO price sentiment.

Source: Hong Leong Investment Bank Research - 27 Sept 2018