United Malacca’s core net loss of RM3.4m in 3QFY19 took 9MFY19 core net loss to RM10.6m. While we expect 4Q to come in stronger (on the back of improved palm product prices), the results disappointed (vs. our projected full-year core net profit forecast of RM0.8m), mainly on the back of lower-than-expected FFB production in Malaysia operations. We revised our FY19 forecast to a core net loss of RM22.4m (from a core net profit of RM0.8m previously), and lower our FY20-21 core net profit forecasts by 21.6% and 20.7%, largely to account for lower FFB output assumption in Malaysia operations. Post earnings revision, we downgrade our rating to SELL (from Hold previously) with a lower TP of RM4.57 (from RM4.90 previously).

9MFY19 results disappointed. United Malacca registered a core net loss of RM3.4m in 3QFY19, bringing total core net loss for 9MFY19 to RM10.6m. While we expect 4Q to come in stronger (on the back of improved palm product prices), the results disappointed (vs. our projected full-year core net profit forecast of RM0.8m), mainly on the back of lower-than-expected FFB production in Malaysia operations.

QoQ. 3QFY19 core net loss narrowed to RM3.4m (from RM6m in in previous quarter), as lower realised palm product prices (CPO: -12.2%; PK: -18.1%) were more than mitigated by seasonally higher FFB output (+25.5%).

YoY. 3QFY19 deteriorated to a core net loss of RM3.4m (from a core net profit of RM8.3m a year ago) mainly on the back of sharply lower palm product prices (CPO: - 26.1%; PK: -44.8%) amidst flattish FFB production (-0.1%) and impact arising from adoption of MFRS framework (which has in turn resulted in much higher depreciation charges). Although more areas have moved to mature bracket (26,168ha vs. 25,029 ha a year ago), FFB output declined by 0.1% to 107,759 mt in 3QFY19 (which higher FFB output in Indonesia operations being offset by a 4.6% decline in Malaysia’s FFB output), as operations in Malaysia were affected by wet weather condition.

YTD. 9MFY19 deteriorated to a core net loss of RM22.2m (from a core net profit of RM27.8m in 9MFY18) mainly on the back of (i) a 14.7% decline in Malaysia operations (arising from extended wet weather condition), (ii) sharply lower realised palm product prices (CPO: -21.3%; PK: -33.7%), (iii) higher unit cost of production (arising from 2,184 ha and 2,961 ha of newly matured young palms in Malaysia and Indonesia young palms), (iv) higher finance cost, and (v) impact arising from adoption of MFRS framework (which has in turn resulted in much higher depreciation charges).

Forecast. We revised our FY19 forecast to a core net loss of RM22.4m (from a core net profit of RM0.8m previously), and lower FY20-21 core net profit forecasts by 21.6% and 20.7%, largely to account for lower FFB output assumption in Malaysia operations.

Downgrade to SELL with lower TP of RM4.57. We reduce our TP by 7.3% to RM4.57, as we lowered our core net profit forecasts and rolled forward our valuation base year (to mid-CY20). While we still like UMB for its young age profile, strong balance sheet (with net gearing of 0.08x as at 31 Jan 19), we downgrade our rating to SELL (from Hold previously) as valuation has become excessive following the downward revision in our core net profit forecasts. At share price of RM5.40, UMB is trading at FY20-21 P/E of 21.7x and 19.6x, respectively.

Source: Hong Leong Investment Bank Research - 22 Mar 2019