Key highlights from our recent conference call with IJMP’s management include (i) FFB output growth guidance of ~5% in FY21 remains unchanged, (ii) CPO production cost to remain flattish in FY21, (iii) Management is hopeful that labour shortfall issue in Malaysia operations will be resolved before/when peak production cycle kicks in, and (iv) Replanting may come in lower than initially guided, amidst uncertainties. We raise our FY21-23 core net profit forecasts by 2.1%, 4.3% and 4.6%, respectively, mainly to account for slightly higher FFB output assumptions. Post earnings revision, TP on IJMP is raised to RM1.78 (from RM1.71 earlier). Maintain BUY rating.

5% FFB output growth in FY21. Despite having clocked in a respectable YoY FFB output growth of 18.8% in 1QFY21, management is still maintaining its FFB output growth of 5% in FY21, as it expects productivity to slow in 2HFY21 (due to dry weather condition). Output growth in FY21 will be driven by additional newly mature area (~300 ha) and higher yield in Indonesia, which will more than mitigate (i) lower harvesting areas in Sabah (due to replanting activities) and slight decline in FFB output contribution from Lampung area (arising from dry weather condition).

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). Management is hopeful to contain its unit production cost achieved last year, as it expects higher labour cost (arising from minimum wage hikes (in both Indonesia and Malaysia) and higher fertiliser prices to be more than mitigated by FFB output growth.

Fertiliser application and price view. IJMP has applied 30% of its fertilised requirement in 1QFY21, and it should be on track to complete its fertiliser application programme in FY21. Besides, management shared that it has already locked in 80% of its fertiliser requirement for the financial year (which on average is 5% higher vis-à- vis FY20’s price).

Labour shortfall. Management is not overly concerned about labour shortfall in Malaysia for now, as it is hopeful that the labour shortage issue will be addressed before/when peak production cycle kicks in (expected by Oct-20).

Replanting. Management shared that it may revise its replanting target of 2,000 ha to 1,500-1,800 ha in FY21, as it is taking a more prudent approach in conserving its cash flow amidst uncertainties.

Forecast. We raise our FY21-23 core net profit forecasts by 2.1%, 4.3% and 4.6%, respectively, mainly to account for slightly higher FFB output assumptions (in line with management’s guidance).

Maintain BUY, with slightly higher TP of RM1.78 (from RM1.71 previousl y). Post earnings revisions, we raise our TP by 4.1% to RM1.78 based on 20x revised FY22 core EPS of 8.9 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. At current share price, IJMP is trading at FY21-22 P/E of 23.0x and 18.2x

Source: Hong Leong Investment Bank Research - 10 Jul 2020