1Q20 core net profit of RM122m (QoQ: +29.7%; YoY: +638.5%) came in below expectations, accounting for only 13.1-16.7% of consensus and our full-year estimates. Higher-than-expected production cost was the key variance against our estimate. Despite the weak FFB output registered in 1Q20, management is still anticipating single-digit FFB output growth in FY20, as it expects output to pick up momentum in the next few months. We lower our FY20-21 core net profit forecasts by 11.6% and 10.9%, largely to account for higher production cost assumption, and maintain our HOLD rating with a higher sum-of-parts TP of RM4.63 (from RM3.73 earlier) as we switched our valuation methodology for its upstream plantation business to EV/ha.

Missed expectations. 1Q20 core net profit of RM122m (QoQ: +29.7%; YoY: +838.5%) came in below expectations, accounting for only 16.7-21.2% of consensus and our full-year estimates. Higher-than-expected production cost was the key variance against our estimate.

Exceptional items (EIs). During the quarter, we adjusted for RM368m worth of EIs, which include (i) RM174m net fair value gain, (ii) RM338m disposal gains, (iii) RM63m unrealised forex loss, (iv) RM2m reversal of impairment, (v) RM5m write off of property, plant & equipment, and (vi) RM74m write down of deferred tax assets.

QoQ. Core net profit expanded by 29.7% to RM96m in 1Q20, as lower FFB output (- 6.2%, dragged mainly by lower output contribution from Malaysia and Indonesia) was more than mitigated by higher palm product prices. Despite facing weaker demand from India and China, PBIT at downstream segment still grew 11.3%, as higher earnings from refineries in Europe more than compensated lower demand from India and China (arising from Covid-19 lockdown).

YoY. Core net profit surged more than 6x to RM96m in 1Q20 (from RM13m in 1Q19), boosted mainly by higher palm product prices (during the quarter, ASPs for CPO and PK rose 29% and 25% to RM2,605/tonne and RM1.519/tonne, respectively) and steady contribution from downstream segment, which altogether more than mitigated a 23% decline in FFB output.

FFB output to pick up significantly for remaining months of FY20. FFB output declined by 16% YoY to 2.1m tonnes in 1Q20, due to prolonged dry weather in Malaysia (which has in turn resulted FFB contribution from Malaysia declining by 23%) and lower mature areas in Indonesia (arising from the disposal of a subsidiary with ~7,300 ha of estates). Despite the weak FFB output in 1Q20, management shared that it is still anticipating decent FFB output growth in FY20 (mid -single digit), as it expects output to pick up momentum in the next few months.

Asset monetisation exercise progress. The group disposed RM279m worth of land bank in 1Q20, and it is on track to dispose another RM1-1.5bn worth of assets in FY20-21.

Forecast. We lower our FY20-21 core net profit forecasts by 11.6% and 10.9%, largely to account for higher production cost assumption.

Maintain HOLD with higher TP of RM4.63. Despite the downward revision in our core earnings forecast, we maintain our HOLD rating with a higher sum -of-parts TP of RM4.63 (from RM3.73 earlier) as we switched our valuation methodology for its upstream plantation business to EV/ha (from P/E earlier), as we believe P/E is no longer a valid valuation methodology post earnings revision, given its ongoing asset monetisation exercise and strategic land bank (particularly in Malaysia).

Source: Hong Leong Investment Bank Research - 27 May 2020