While We Like IJMP for Its Improving Earnings Prospects, Young Age Profile and Prudent Management, Near-term Upside Is Capped by Relatively High Valuations. We Lowered Our FY20 Core Net Profit Forecast by 20.5% to RM21.5m, as We Raise Our Finance Cost Assumption. FY21-22 Core Net Profit Forecasts Were Nudged Slightly Lower (by 0.2% and 2.4%) as We Tweak Our FFB Yield and Finance Cost Assumptions. Post Revisions, We Maintain Our HOLD Rating on IJMP, With a Slightly Lower TP of RM1.99 (from RM2.04 Previously).

High single-digit FFB output growth for FY20-FY21. IJMP registered FFB output growth of 11% in 9MFY20, and management guided that that FY20 FFB production growth will likely slow marginally to 8-10%, bringing group FFB output to 1.05-1.07m tonnes. Moving into FY21, management guided that FFB output growth will slow to 5- 7% as FFB output contribution from 1,500 ha of newly mature area (in Indonesia) will be partly offset by higher replanting area (in Malaysia).

Replanting to pick up in FY20-21. We understand that replanting activities will pick up to circa 1,000 ha in FY20 and 2,000 ha in FY21 (vs. 752 ha in FY19), given the high age profile in Sugut estate, Sabah.

Unit production cost to fall on higher output. Management guided for CPO production cost to decline in FY20-21, as lower PK credit (arising from lower PK prices) and minimum wage hike in Indonesia will be more than mitigated by higher FFB output.

3Q20 results preview. IJMP’s 3QFY20 core financial performance (due out on 25 Feb 2020) will likely improve both YoY and QoQ, due to higher FFB output and realised CPO price. However, the improved set of core performance may not be reflected in its headline results, as we understand that it has committed more forward sales at early stage of CPO price run-up, and this means the headline performance may be distorted by higher amount of unrealised losses (given the mismatch between locked in CPO price and CPO price in end Dec-19).

To regain Shariah status by end-2020. IJMP has already refinanced part of its loan, which would in turn allow it to be qualified as a Shariah compliant stock in the next review (expected by end Nov-20). Recall, IJMP was removed from the Shariah list in end Nov-19, as its conventional debt/total assets ratio surpassed the threshold level of 33%.

Potentially higher dividend. We note that IJMP still paid DPS of 2 sen in FY19 despite palm oil prices being low. We believe DPS could potentially be higher than our projected DPS of 2 sen in FY20, given the recovery in palm oil prices and lower capex.

Forecast. We lowered our FY20 core net profit forecast by 20.5% to RM21.5m, as we raise our finance cost assumption. FY21-22 core net profit forecasts were nudged slightly lower (by 0.2% and 2.4%) as we tweak our FFB yield and finance cost assumptions. Ceteris paribus, every RM100/tonne change in our average CPO price assumption will swing our FY21 core net profit forecast by 9.3%.

Maintain HOLD, TP: RM1.99. We maintain our HOLD rating on IJMP with a slightly lower TP of RM1.99 based on 25x revised FY22 core EPS of 8 sen (from RM2.04 previously), to reflect the slight downward revision in earnings forecasts. While we like IJMP for its improving earnings prospects, young age profile (average age of 14 years for Malaysian estates and 8 years for Indonesian estates) and prudent management, near-term upside is capped by relatively high valuations.

Source: Hong Leong Investment Bank Research - 6 Feb 2020