Key highlights from our recent conference call with IJMP’s management include (i) FFB output growth guidance of ~5% in FY21 and its operations in Sabah (which accounts for ~41% of its total planted landbank) does not face major disruptions from MCO, (ii) CPO deliveries to refineries remain well taken up, and IJMP still has sufficient storage facilities to store CPO even if CPO demand weakens, (iii) CPO production cost is guided to be flattish in FY21, and (iv) IJMP may not regain back its shariah compliant status by Nov-20, given the weaker Rupiah (against USD) in end-Mar 2020. We lower our FY20-22 core net profit forecasts by 7.4-9.5%, largely to reflect (i) actual output recorded in FY20, and (ii) higher CPO production cost assumptions in FY21-22. Post earnings revision, we maintain our BUY rating on IJMP, with a lower TP of RM1.71 (based on 20x revised FY22 EPS of 8.6 sen).

Minimal disruptions from MCO; FFB output growth guidance maintained. IJMP’s FFB output increased by 8.7% to 1.06m mt in FY20 (in line with management’s guidance of 8-10%), driven by additional newly mature area in Indonesia and FFB yield recovery in Sabah operations. Management is guiding FFB output growth of ~5% in FY21, supported by additional newly mature area and higher yield in Indonesia (which will more than offset ~2,000 ha earmarked for replanting). We gathered that IJMP’s operations in Sabah (which accounts for ~41% of its total planted landbank) does not face major disruptions from MCO, except for certain logistic issues (arising from jetty closure, which has reopened since 26 Apr).

Uptake for CPO remains decent. Despite the recent retracement in CPO price, management shared that CPO deliveries to refineries remain well taken up. Should demand for CPO weaken, management shared that its storage facilities are still sufficient to store up for another month of production.

Flattish CPO production cost guided for FY21. IJMP achieved CPO production cost of RM1,800/mt (for Malaysia operations) and RM2,000/mt (for Indonesia operations), and such production costs will remain flattish in FY21, as impact from minimum wage hike, higher fertiliser application, and additional costs in putting up safety measures will be more than mitigated by FFB output growth.

Replanting to pick up in FY21. Replanting activities will pick up to 2,000 ha (from ~700ha in FY20), mainly for Sugut estate, Sabah.

May not be regaining Shariah compliant status by Nov-20. IJMP has refinanced part of its conventional borrowings into Shariah compliant borrowings in Sep/Oct 2019, which was sufficient for IJMP to regain its shariah compliant status at that time. However, management shared it may still not be able to regain back its shariah compliant status by Nov-20 despite having refinanced part of its conventional borrowings, due to weaker Rupiah in end-Mar 2020 (which is the cut-off date for IJMP’s financial year-end), which has in turn distorted its desired conventional debt/total assets ratio of no more than 33%.

Forecast. We lower our FY20-22 core net profit forecasts by 7.4%, 8.2% and 9.5%, respectively, largely to reflect (i) actual output recorded in FY20, and (ii) higher CPO production cost assumptions in FY21-22.

Maintain BUY with lower TP of RM1.71. Following the downward adjustment to our core net profit forecasts, we lower our TP on IJMP by 9.6% to RM1.71 (based on 20x revised FY22 EPS of 8.5 sen). We continue to 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.

Source: Hong Leong Investment Bank Research - 29 Apr 2020