Key highlights from our recent conference call with IJMP’s management include (i) CPO price to remain elevated for the next six months, (ii) flattish FFB output growth guidance in FY22, due to unfavourable weather effects and labour shorfall, (iii) production cost will likely trend up marginally in FY22, due to slightly higher fertiliser cost and minimum wage in Indonesia amid flattish FFB production growth, (iv) labour shortage remains manageable for now, until peak production cycle kicks in, and (v) IJMP will not regain its Shariah status anytime soon. Maintain FY21-23 core net profit forecasts, pending a review in our sector-wide CPO price projection. Maintain BUY rating on IJMP, with an unchanged TP of RM2.29 (based on 20x FY22 core EPS of 11.5 sen).

View on CPO price. Management believes that tight supplies and stable demand for palm oil will sustain CPO price at elevated level for the next six months. Nevertheless, the full effect of high CPO prices will not be felt in its earnings, as effective CPO selling price in Indonesia is capped by the export levy structure in Indonesia. At current CPO price of RM3,700-3,800/mt, the effective CPO selling price is significantly lower at RM2,700-2,800/mt in Indonesia.

Forward sales. IJMP has locked in forward sales of 10-15% of its production in Malaysia in FY22 (vs. 30% last year), as forward sales market has been relatively quiet amidst high CPO prices currently.

Flat output growth in FY22. Management indicated that FFB output growth was flat in FY21 (lower than its earlier guidance of 5%), as some of its planted areas (Lampung and East Kalimantan) were impacted by drought. Moving into FY22, FFB output growth will likely be flattish, as FFB output contribution from newly mature area (estimated 1,000-1,200 ha) will be offset by lagged drought impact from the two abovementioned areas (which distorted male and female flower inflorescence, hence affecting output), heavy rainfall in certain areas (which resulted in logistic difficulties), and more aggressive replanting activities in Sabah (2,000-2,500 ha in FY22 vs. 1,000- 1,200 ha in FY21). Production cost. IJMP achieved CPO production cost of RM1,800/mt (for Malaysia operations) and RM2,000/mt (for Indonesia operations). Production cost will likely trend up marginally in FY22, due to slightly higher fertiliser cost and minimum wage in Indonesia amid flattish FFB production growth. We understand that IJMP has locked in its fertiliser requirement for FY22, which prices are 7-10% higher YoY.

Labour shortfall. Management is not overly concerned on labour shortfall for now, until peak production cycle kicks in (expected by Sep/Oct-21). Management indicated that it may face labour shortfall in Indonesia, should there be an exodus of labour there.

Shariah compliant status. Management shared that it will not be regaining its Shariah status anytime soon, given its loan composition in its balance sheet (where bulk of the loans comes from Indonesia).

Forecast. Maintain for now, as we are in the midst of revisiting our CPO price assumptions (with upside bias) for the sector.

Maintain BUY, with unchanged TP of RM2.29. We maintain our BUY rating on IJMP, with an unchanged TP of RM2.29 (based on 20x FY22 core EPS of 11.5 sen). We continue to like IJMP for its improving earnings prospects, young age profile (average age of 15 years for Malaysian estates and 9 years for Indonesian estates) and prudent management.

Source: Hong Leong Investment Bank Research - 7 Apr 2021